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How will the coronavirus affect your investments?

If you’re an investor, there’s one question that’s probably foremost in your mind: “How will the novel coronavirus COVID-19 affect my investments?”

From its origination in China, the coronavirus has spread throughout the world, and researchers are working around the clock to find a vaccine. In the meantime, health concerns have led to factory closures, supply chain disruptions, a sudden drop in air and cruise travel — and massive volatility in the stock market.

As a result, economic growth projections for 2020 have fallen, and the risk of a recession has increased. Corporate earnings are likely to be lower than expected.

Responding to these concerns, the Federal Reserve has taken emergency action, dropping its federal funds rate to reassure investors and provide a certain amount of stimulus to the nation’s economy.

However, there are no guarantees regarding the timing and nature of an economic recovery. It’s possible the U.S. will have a rapid return to near-normal conditions, a gradual upturn, or a prolonged downturn. There is simply no way to predict the future — particularly when there are other variables affecting the financial markets like the upcoming 2020 elections.

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Actions to Consider

While the coronavirus situation is likely to change from day to day, there are steps investors can take to ride out the storm.

First of all, take a deep breath. Unless you have a financial emergency and need to sell assets right away, you can take a wait-and-see attitude to a downturn in the financial markets. Although it’s painful to see losses on your balance sheet, there is no actual financial impact until you sell those stocks or bonds in your portfolio.

Historically, downturns in the stock and bond markets happen from time to time. Some are triggered by unexpected events, while others reflect changes in investor sentiment or slower business conditions. So, this is not a time to panic and sell your stocks at a loss.

Along with patience, you should also cultivate the ability to live with uncertainty. In the investment world, there is no telling which assets will rise or fall – or when those changes in value will occur.

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Therefore, you should talk with your financial advisor about constructing a well-diversified portfolio that reflects your ability to tolerate risk, as well as your desire for steady income or a certain rate of return. Such a portfolio might include a money market fund, real estate and both U.S. and international stocks and bonds.

For long-term investors, a diversified portfolio can help you manage volatility in the stock market. Instead of having 100 percent of your portfolio in U.S. stocks, you might have significant allocations to bonds, real estate or private equity. While it doesn’t guarantee a profit or protect against loss, a diversified portfolio could potentially reduce the impact of the stock market on your balance sheet.

Diversification can provide other benefits, such as liquidity. If you have a sudden need for cash, you could tap a money market fund without having to sell stocks or bonds. Then you could gradually rebuild that cash-like position as your financial situation improves.

Other potential benefits of diversification include a certain level of protection against inflation. While it’s been more than a decade since rising prices threatened to erode the value of your holdings, it’s possible that a higher level of inflation could return in the coming years.

Many investors also include a significant allocation to bonds in their portfolios. They can provide a steady stream of income — an important consideration for retirees who are no longer earning wages or a salary.

Traditionally, bond values are less volatile than stocks, so their market changes have less of an impact on the overall portfolio. Also, many investors don’t realize that when bond yields go down, their holdings can actually rise in value — another difference from the stock market.

A diversified portfolio can provide a solid foundation for long-term investing. If you are concerned about the coronavirus, talk with your financial advisor. Stay calm, and don’t let your emotions determine your investment decisions.

Andrew Menachem, CIMA®, is a Wealth Adviser at The Menachem Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS.

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