'Don't run to gold' and other advice for pandemic volatility

As U.S. investors panicked Tuesday amid global reports of a wider outbreak of the coronavirus, financial advisers urged their clients to avoid reacting negatively to the market dip.

More new cases of infection were reported outside of China – including dozens of patients now in the U.S. – and the Centers for Disease Control and Prevention warned the public to prepare for widespread contagion within the U.S.

The markets tumbled. The Dow Jones Industrial Index fell nearly 900 points, or over 3%, during the day, while the S&P 500 dropped by about 3%. Those moves followed similar dips on Monday, when the Dow fell by 3.5%, closing more than 1,000 points lower than its 28,993 close on Friday, Feb. 21.

Adviser Paul Schatz, president of Heritage Capital, said he has tried to prepare clients for months for the volatility. Because of that, he heard from only a few people after the market drop.

But for anyone thinking of rebalancing, Mr. Schatz had one piece of advice. “If you weren’t smart enough to take [defensive] measures on Friday or Thursday, don’t react today ... Certainly don’t run to gold right now,” he said. “People are going to look for safe havens.”

Advisers told clients to sit tight, at least until the market recovers.

“I have had a few clients reach out today,” Lamar Watson, founder of Dream Financial Planning, said in an email. When taking on clients, Mr. Watson uses Riskalyze to understand their risk tolerance, and he explains how volatile the stock market can be, he said. He also encourages clients to focus on what they can control, like spending and saving, he said.

“The coronavirus would definitely fall into the uncontrollable bucket,” Mr. Watson said. “I also remind them that their investments are only a small part of their overall financial picture and that this, too, will pass.”

Although many clients were concerned, they were also familiar with market volatility, advisers said. Investors’ memories of the market's dip in late 2018 and its swift recovery in 2019 are a plus in that regard, they said.

“Most of our clients have been relatively calm – it has been helpful to put in perspective for them what their portfolios did during 2019 and the little volatility we saw during the year,” Brett Fry, wealth adviser at Forteris Wealth Management, said in an email. “It has also been helpful for our clients to see how they are relative to their goals and relative to where they were to start the year.”

When clients are well-educated about volatility, they don’t tend to worry after two days of market drops, Mr. Schatz said.

“I don’t think people will ever get comfortable with volatility,” he said. But “I’ll hear from people when the [earnings] statements come out and it’s a quarterly decline.”

Despite this week’s performance, “the bull market remains alive and well,” Mr. Schatz said. “And after this decline, we will see fresh, all-time highs by summer.”

The severe acute respiratory syndrome, or SARS, pandemic in 2003 showed that some market volatility should be expected, advisers noted.

“I try and prepare my clients for market movement like this no matter what the cause,” Ben Lies, president and chief investment officer at Delphi Advisers, wrote in an email. “The key is to scale the impact and look at each event in historical retrospect.”

Along with SARS, the outbreak of Middle East Respiratory Syndrome in 2012 is recent enough for many investors to remember. Even though MERS had a 34% mortality rate, the markets were largely unaffected, with the S&P 500 returning 13% in 2012 and 29% in 2013, Mr. Lies said. The 2003 SARS outbreak, which had a 7% mortality rate, also ultimately had no long-term negative effect on markets, with the S&P returning 26% in 2003 and 9% in 2004, he said.

By comparison, the mortality rate reported so far in connection with the coronavirus is less than 3%.

“Both SARS and MERS caused a lot of volatility in the market, but overall, markets recovered quickly and reverted back to the underlying trend,” Mr. Lies said. “When you take clients through the market history, it becomes pretty clear that [the coronavirus] won’t likely have significant long-term effects on their portfolio. But that doesn’t mean it’s not difficult and very sad for those afflicted.”

Other financial professionals noted that some clients see the market dip as an opportunity.

“Several weeks ago we sent out communication to our clients letting them know that historically the market has had a short-term negative reaction to previous outbreaks and that the market quickly rallied,” Leibel Sternbach, founder of Yields4U, wrote in an email. “We’ve been using this dip to invest our cash holdings, and our contrarian strategy has been having a field day buying beaten-up companies these last few weeks.”

One adviser said he cautioned a client against being too hasty about buying during the market dip.

“I spoke to a client of mine yesterday who asked whether we should reconsider investing some of her excess cash now,” said Michael Caligiuri, chief executive officer of Caligiuri Financial. Instead, he advised the client to stay on course by incrementally investing that cash over 12 months, he said.

“I also reemphasized my recommendation to consider allocating 5% to 10% of her portfolio to precious metals, as they can enhance an investors’ diversification,” Mr. Caligiuri said.

Even within 401(k) plans, trading was much higher than average at the start of the week.

On Monday, plan participants in Alight Solutions’ defined-contribution business traded at nearly four times the average rate, with investors migrating from stock-heavy funds to fixed income, according to the company. But even with the higher level of activity, only 0.06% of total plan assets were traded, Alight reported.

This story has been corrected to indicate that the S&P 500 posted a return of 26% in 2003. An earlier version misstated the return at 36%.