The best thing you can do in today’s markets is to keep calm. Even if we are heading into another financial crisis and the economic recession it is not the end of the world. Every crisis brings new opportunities although they might not seem obvious among turmoil.

I wrote before that the biggest risks for markets are events which we do not know about. Coronavirus pandemic is exactly that sort of event — Black Swan in markets.

There are lots of articles and posts on Coronavirus and its implications on the markets. I’m not going to give here another market predictions. Why? Because I simply don’t know what is going to happen. And the truth is — nobody knows. Yet, I will offer you a way to behave in those markets.

How should we then behave in such circumstances?

What we observed in markets over the last couple of weeks is extraordinary and historic— the probability of such violent price actions is lower than 0.1%. In other words, it was close to impossible to predict it.

Of course, there were people who expected market crash but very often they were calling it for a very long time and they didn’t have a pandemic in their forecast. There was also a small group of investors who were lucky to have the right position. But I’m pretty sure most of the investors, professional and amateur, suffered great losses in the last few weeks. If you are one of them, don’t blame yourself — you are not alone. Don’t waste your time and energy on regrets and self-blame. Its time to think ahead and prepare for more volatility.

There are three main challenges we are facing:

1. We dealing with the absolute unknown. No matter how much we read, study, follow others, we are not going to know what is going to happen. These are completely unchartered territories for societies, economies, and markets.

2. Investors are human beings and they are driven by emotions. Every investor has its own family and is worried not only about his market position but more importantly about the well-being of the closed ones. This makes the markets even more prone to overreaction.

3. The market has already been overvalued after one of the longest expansion in history. We heard about too optimistic valuations in many asset classes. Central banks’ policies of providing abundant liquidity hugely contributed to the inflation of asset prices. Therefore, predicting how low the market can fall from elevated levels is always much harder.

I have a few pieces of advice in this environment:

  • It’s not a time to be a hero.

It’s great if you can predict a market crash or catch the bottom of the market in freefall. Yet, the truth is both of those are almost impossible.

‘You only have to do a very few things right in your life so long as you don’t do too many things wrong’ — Warren Buffett

In an environment when we can’t make reasonable assumptions and predict economic impacts we should act accordingly. If we can’t win, we should try not to lose.

What I’m trying to do with my portfolio is to protect it from big drawdowns. It’s not easy with such big moves and poor liquidity. However, I try to make sure even if price action continues to meltdown my portfolio will survive.

I wrote about it here:

Think of the worst-case scenario despite not knowing when and how it will happen.
The fact that you don’t know what will cause nor when will be a major risk event does not mean you should not prepare yourself. Of course, you can’t hedge against the unknown but you can ask yourself: if a major market crash happens today, would my portfolio survive such a shock?

However, if you haven’t prepared your portfolio for the worst, be careful not to fall in a panic now. We are already in the midst of turbulent price movements. It’s not a time for spontaneous decisions.

  • Every crisis ends with new opportunities.

My sense is we are not at the end of it but as I said before —almost nobody will catch the bottom anyway. So how am I trying to capture them? We need three things:

  1. a list of long term investments we would like to have in our portfolio.
  2. the amount which we are willing and able to invest (either as a total amount or a percentage of your income).
  3. commitment to start adding small amounts over an extended period of time (this way we can average our purchase price).

The last point is crucial in successful long term investing. There will be moments of panic. There will be forecasts we are heading into the abyss. Everybody around will be coming up with even worse predictions. This is when we need to stay calm and carry on. This will be over one day.

Alternatively, you can choose the safe option and wait until its all over. You are not going to get a bargain price but at least you know you will avoid the worst.
Stay safe and protect your family in the first place.

  • There are circumstances in life when profits are not the most important thing.

I have a feeling it’s one of those periods. I know this pandemic will end one day (hopefully sooner rather than later). There is also a chance the world will look quite different after it’s over. However, for now, it’s the most important to stay safe and protect your families.