Beginner’s Guide to Market Volatility

Warren Buffett: Coronavirus is 'scary stuff,' but long-term investors don't need to worry

Twenty/20

The U.S. stock market tumbled into a correction this week, with the S&P 500 down more than 13% early Friday from its all-time high last week and the Dow Jones Industrial Average down nearly 14%. The declines are in response to the deadly coronavirus that originated in China. The number of confirmed cases outside China surged and spread to the U.S., which has stoked fears of a prolonged global economic slowdown from the virus spreading.

Other markets are reflecting a rush to so-called safe haven assets. Gold prices have surged to the highest level since 2013. The yield on the benchmark 10-year Treasury note, which moves inversely to price, has fallen to an all-time low, as has the 30-year rate.

But legendary investor Warren Buffett cautioned at the start of this week that this virus doesn't need to upset your investing strategy. "It is scary stuff. I don't think it should affect what you do with stocks," he told CNBC's Becky Quick on an interview that aired February 24 on "Squawk Box."

"We're buying businesses to own for 20 or 30 years. We buy them in whole, we buy them in parts ... and we think the 20 and 30 year outlook is not changed by the coronavirus," Buffett said.

As he points out, while current events can be scary and cause short-term uncertainty, it's important to remain focused on the bigger picture. To put this week's moves in perspective, the S&P 500 has fallen in excess of 3% on four days this week and moves of this magnitude typically happen about four times each year.

Experts caution that history shows that the potential impact of the virus on the markets is likely to be short-lived. Rather than focusing on day-to-day fluctuations, it's best to focus, like Buffett himself does, on the long-term merits of investing.

Why the outbreak is spooking traders

Since the World Health Organization recognized the deadly pneumonia-like virus as a global health emergency in January, it's been blamed for declines in the major benchmarks, breaking what had been a relatively calm period for the market since October. And some market watchers have speculated that fears about a global economic slowdown could result in a market correction, or decline of at least 10% from a recent high, something that hasn't happened since late 2018.

The coronavirus is having the biggest impact on Asian markets. However, because China, where the virus originated, is the world's second-largest economy, what happens there has a ripple effect on global growth.

Even so, pinpointing the potential impact remains a guessing game. Kristalina Georgieva, head of the International Monetary Fund, said coronavirus outbreak is the "most pressing uncertainty" facing the world economy right now. Meanwhile, U.S. officials will have a better idea of how the coronavirus outbreak will impact the economy in "three or four weeks," U.S. Treasury Secretary Steven Mnuchin said in a February 23 interview with CNBC.

What history suggests

Whenever a news event spooks people on Wall Street, it's important to remember that the market has been through much worse and has always bounced back. And that's why it's important to put the source of the market's latest bout of bumpiness in context.

As a result of this week's decline, the S&P 500 is trading at levels last seen in October. There have been similar health scares in the past, like SARS in 2002 and 2003. There were an estimated 8,000 people infected with SARS, or severe acute respiratory syndrome, and nearly 800 died.

China's economy slowed by 5 percentage points as a result of SARS, though it quickly recovered, Mark Williams, chief Asia economist at Capital Economics, told CNBC. And same with the markets. "Within a few weeks in 2003, the Chinese equity markets had made up a lot of their losses," Williams said.

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What to focus on instead

It's important to consider the long-term consequences associated with a short-term decision, like reacting to daily fluctuations in the market. That's because, in theory, any given day's headlines could hand investors reason to become anxious and sell stocks.

"You don't buy or sell your business based on today's headlines. If it gives you a chance to buy something you like and you can buy it even cheaper, you're in good luck," Buffett said in his recent CNBC interview.

If you sell investments because of a bout of turbulence, you could miss out when the market eventually rebounds, as it always has in the past. And treating your investment account like an ATM could create an unexpected tax burden.

Before you consider selling an investment, ask yourself three questions: Why are you selling? What will it cost? What happens next?

In addition, it can be helpful to look at longer time periods to see that the market's trend is upwards. For example, if you'd invested $500 in various U.S. benchmarks back in 2009, those investments would have ballooned to at least $1,500 in 10 years.

So instead, focus on what you can control with investing. Manage your investing risks by maintaining a long time horizon, diversifying with low-cost index funds, continuing to add money to your portfolio with a strategy known as dollar-cost averaging, and overcoming your investing-related fears.

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