February 26, 2020
Even if you only have a small amount of money invested in the stock market, you have probably felt more than your fair share of jitters in recent days watching the stock market fall in reaction to the worldwide spread of a deadly strain of coronavirus. You probably have also wondered why this is happening.
In this article, we will describe why the virus is so dramatically affecting the markets and show you how you can protect yourself against this and other similar events that are beyond anyone’s control, which can send markets and the value of your investment portfolio spiraling downward.
Coronaviruses are not something new. They are a type of virus that spreads from both humans and animals, and they include such benign inflictions as the common cold. What is new is this strain of coronavirus, which is called Covid-19. It originated from seafood that was sold at a wholesale market in the Chinese city of Huanan, and it has since spread across the country before spreading in South Korea, Iran, and Italy. It has so far caused thousands of deaths across the world, and with no cure or vaccine on the horizon, the World Health Organization (WHO) is considering declaring the outbreak a pandemic.
The spread of Covid-19 has caused the Dow Jones to fall nearly 1,900 points in two days, and there are reasons to believe that this could be a long-term problem. But why is this happening?
While some of the fall can be attributed to irrational panic among investors, there are also many tangible reasons for the decline in stock prices. The spread of the virus has caused a significant amount of disruption in industrial production. This is particularly true in China, which is the world’s largest exporter of goods. This, in turn, has adversely affected large multinational companies, such as Apple, which rely on China to produce the products that they sell.
Right now, investor worries are twofold. First, they are worried that the virus will cause a major supply shortage that could affect the earnings of many big companies. But they are also worried that the virus could eventually cause a worldwide economic slowdown that could potentially bring down all sectors of the American economy, including those that are not dependent on imports. This, in turn, could reduce demand for many products and services and also lower earnings.
Some may brush off this virus scare as just a momentary event that the markets will eventually overcome, much as they have overcome other serious global health scares in the past. But health scares are just one type of event that can adversely affect financial markets. Major natural disasters, such as earthquakes and floods, can cause markets to tailspin. The same is true for disruptive political events, such as war and terrorism.
Even if you believe that financial markets will always overcome these kinds of events, and so far they have, most investors still have to look both short-term and long-term. Believing that the markets will rebound in six months or a year will not help you if for some reason you need money tomorrow.
One of the side effects of the coronavirus scare is that, coinciding with the fall of the stock market, the price of gold has shot up greatly. It has increased over 10% since the beginning of the year, and it recently reached its highest price in seven years.
This is because gold acts as a hedge against turmoil in the markets. Investors can count on gold to hold its value no matter what happens in the world. So, not only do they flock to it during times of trouble, but they also use it as a means of diversifying their portfolios. By doing this, they know that, no matter what happens in the world, their portfolio is protected.
However, gold is not without its drawbacks as an investment instrument. One of the biggest of these drawbacks is that it generally does not appreciate in value. It instead mostly goes up and down inversely with the state of the markets. Even after its recent highs, the price of gold is still less than what it was back in September 2011, and when the markets eventually do recover, you can expect gold to once again fall.
Fortunately, there are other alternative investments that act as hedges in a diverse investment portfolio while at the same time appreciating in value. According to Forbes, one of the best of these investments is residential real estate. Historically, the prices of residential properties do not correlate with rises and falls in the stock market. Furthermore, residential real estate represents a tangible asset that people can depend on and will always need irrespective of market values.
Traditionally, though, there has been one major barrier with investing in residential real estate: access. While just about everyone has the ability to invest in the stock market, very few investors have the capital required to buy property for investment purposes.
But buying an entire property is no longer necessary. With companies such as DiversyFund, you can buy a share of a property just as easily as you can buy a share of a company, through what is known as a real estate investment trust (REIT). REITs are a great way to diversify your investments and hedge against events such as coronavirus. But they also make a great investment, too. Average 20-year REIT returns are 9.9%, which is 77% more than corresponding S&P 500 returns over the same period of time.
So, if you want to get rid of those jitters that accompany events such as coronavirus, insulate your investment portfolio by smartly diversifying it with alternative investments such as residential real estate.