Since Monday, the Dow has dropped 450 points on coronavirus fears.
The virus has infected more than 4,500 people and killed at least 106, mostly in the city of Wuhan, Hubei province, China. It has spread to other countries, including the U.S., Japan, and South Korea, and public-health officials have warned that it is growing more contagious.
Worries about the Wuhan coronavirus are not only rocking our domestic market but are hitting global stock markets as well.
Riding the longest bull market in history, investors are justifiably concerned about when and how it will finally end. So, it’s no surprise that a global crisis like the coronavirus is enough to set off a selling spree whether there’s a link to the spread of the virus to actual economic performance or not.
Whether it’s the coronavirus, the threat of war with Iran or Chinese tariffs, these days, it doesn’t take much to spook investors and set off a selling spree.
Such is the nature of Wall Street liquidity. When investors can unload stock at the swipe of their phones, sometimes it doesn’t take much for the masses to move in herds – leading to significant market plunges.
While newsmakers like the coronavirus can incite panic in retail investors, another group of investors is comfortable sitting back and riding out the wave.
These elite investors are always prepared for the worst because they don’t invest like retail investors who are jerked around by market volatility.
They’ve learned to insulate themselves from this volatility by:
- Recognizing market deficiencies.
- And devise strategies to overcome those deficiencies.
Here are some examples of market challenges and how you can confront them just like the elite investors do:
Liquidity can wreak havoc on investors. Liquidity is like a panic button investors can push to jump out a plane they think is going down. If they see everybody else jumping out of the plane, the natural instinct is to follow.
In most cases, had they not pushed the panic button and jumped ship, the plane would have corrected itself and gotten them to their destination. Unfortunately, most retail investors push the panic button way too often, which explains the extreme ups and downs of Wall Street volatility.
With liquidity, you feel you need to monitor the market constantly to not be too late in either buying a stock on the upswing or selling a stock on the downswing.
Savvy investors eliminate the panic button. They intentionally invest in alternative assets that are illiquid that eliminate the option to exit until five, seven, ten years down the road. They know that they will eventually reach their destination.
By following the lead of these savvy investors, you should consider reallocating your funds to more illiquid alternative assets such as private investments. With private investments, once you commit, you’re in it for the long haul, and you also eliminate the worry and nervousness of wondering what the next guy is doing because the next guy is in the same long-term boat as you.
Challenge: Vulnerability. (Susceptibility to News: War, Tarifs, Viruses).
Closely connected to #1 above, liquidity and the 24-7 news cycle combine to make the markets highly susceptible to negative developments that can wreck portfolios on a large scale.
Get off the Wall Street roller coaster. Invest in assets that have a low correlation to Wall Street that aren’t vulnerable to the slightest signals.
Also connected to #1 and #2, stock valuation is often purely speculative. Stock price valuation is less often based on any underlying market fundamentals like profitability and more often based on speculation and what the next fool is willing to pay for it.
Focus on income investments that are quantifiable and verifiable. The valuation of your investment should be based on sound market fundamentals like the expected income stream and predicted growth/appreciation.
Your wealth shouldn’t rely on a roll of the dice and the madness of the markets. Sponsors of many private investments have a successful track record in an asset class with reliable historical performance and data both at the sponsor as well as the asset level.
Slow and unpredictable growth with stocks. With unpredictable share pricing – not 100% sure whether it’s going to rise or fall – and an undefined exit plan, it’s hard in those circumstances to effectively model an effective wealth-building plan.
Invest in an asset class with a fixed or reliable income stream that you can use to chart your wealth. Set up an automatic reinvestment plan for this income to compound your wealth.
Challenge: Trendy Investments.
We often follow the trends rather than lead them. While you may not admit it, you’re usually late to the party, and the gains aren’t so great, or you get out too late and lose more than you hoped.
Don’t follow the herd. Be greedy when others are fearful. Do the opposite of the masses and follow the elite investors.
In the modern digital age, where everything happens in real-time, and everything is available on-demand, the markets have never been more vulnerable to negative news, rumors, and innuendo.
The slightest sign of trouble can lead to mass hysteria.
Wall Street liquidity and unpredictability contribute to this general investor jitteriness. It prevents investors from truly and effectively planning and executing a proper wealth-building roadmap.
Elite investors take themselves out of the liquid world of Wall Street and insert themselves into the illiquid world of private investments where income is consistent, reliable, and quantifiable and where wealth can be charted and accumulated.