Investing

How coronavirus is moving the market and why it doesn't have to change your investing strategy

Twenty/20

In theory, any given day's headlines could hand investors reason to become anxious and sell stocks. Today it's the deadly coronavirus. Tomorrow it could easily be something else.

From Wall Street's perspective, the concern is that the coronavirus could lead to slower economic growth in China, which in turn could have a global impact. The news has been blamed for declines in the major benchmarks, breaking what had been a relatively calm period for the market since October.

The World Health Organization recognized the deadly pneumonia-like virus as a global health emergency on Thursday, and there have been several confirmed cases in the U.S. Both the Dow Jones Industrial Average and S&P 500 are down more than 1% as of midafternoon Friday, adding to losses of nearly 3% since January 23. Meanwhile, a sell-off in crude oil has intensified: The price of this commodity has slid about 16% so far this year.

While current events can be scary and cause short-term uncertainty, it's important to remain focused on the bigger picture. Experts caution that history shows that the potential impact on the markets is likely to be short-lived and generally say that rather than focusing on day-to-day fluctuations, it's best to focus on the long-term merits of investing.

Here's how to keep perspective.

Why the outbreak is spooking traders

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

Economists don't expect the Chinese economy to suffer a large or even lasting hit. But reporting by CNBC found that economists are reluctant to estimate on just what type of impact the coronavirus will have until there's more information. And some experts believe this virus is "a wild card" that could affect the pace of economic growth in the current quarter.

In addition to the declines in the oil market, airline stocks have also been tumbling in recent days on fears related to the coronavirus and travel.

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.

The S&P 500 on Friday is poised to fall by more than 1%, the second decline of at least this much during the week. But 1% moves are actually pretty common; this index has moved up or down by at least 1% on about 28% of trading days in the past 20 years.

What's more, 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.

SARS impacted China's economy by 5 percentage points, 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.

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.

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, diversify with low-cost index funds, continue adding money to your portfolio with a strategy known as dollar-cost averaging, and overcome your investing-related fears.

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