How An Investor Should Approach The Coronavirus.

This is a time, when just such a crisis is threatening. The Wuhan China Coronavirus. Before we begin there are three basic questions that we want to ask in any crisis like this: 1. How close are we to a resolution of the problem. 2. How serious might this problem be and 3. How might this crisis affect my personal portfolio.

There's a true story told, about a young Peter Lynch. You may have heard me talk about it before.

The year was 1987, and Peter Lynch was the manager of one of the most successful, and largest mutual funds of all-time: The Magellan Fund.

Now Peter had been working very hard for years, shepherding the fund as it grew and grew. It was time for a well-deserved vacation, and as he was an avid golfer, he chooses a vacation in Scotland, the home of sport.

Well, just as Peter was teeing off on the third green, a caddy came running across the fairway. Mr. Lynch, Mr. Lynch, you have a satellite phone call from the United States. This was before cell phones, and Peter's Boston office had been trying to reach him all morning.

It was the Crash of 87 and the markets in the US were in free fall. Redemptions in Magellan Fund was spiking, and he had to do something right away.

Suffice it to say, that Peter took care of this problem with the grace which he had handled others before. Selling off the weakest Magellan positions before flying back to Boston.

As investors, we need to have the foresight, and courage to act in difficult situations, just like Peter Lynch did.

This is a time, when just such a crisis is threatening. The Wuhan China Coronavirus.Before we begin there are three basic questions that we want to ask in any crisis like this:

1. How close are we to a resolution of the problem.

2. How serious might this problem be and

3. How might this crisis affect my personal portfolio?

With those in mind lets look at the crisis of the Coronavirus.

We've done a couple of podcast on this new strain of Coronavirus, labeled 2019 n-CoV.

The first thing to be understood here is that we are right at the beginning of this crisis. Details are sketchy, to say the least. We will not be able to determine the likely outcome of this epidemic for some time.

But based on current information, here are some reasonable projections for the disease.

First it appears that the virus is highly contagious. There are some British researchers who are projecting incredible rates of infection for the disease. Perhaps the highest we've seen since the influenza outbreak of 1918, a century ago.

So, yes it is possible that this is a hundred-year pandemic. Right now there is no way for us to know if this will be the case. Our second question is: are we at the beginning of this crisis? Absolutely, yes. This is the very beginning. So the Coronavirus has the most potential to grow significantly.

And the final question: how will this affect our personal investment portfolio?

Here, at last, some good news. It is not likely that this will have a major impact on our portfolio.

With a couple of exceptions. American companies doing business in Wuhan, and China, in general, may be impacted. Already shipping companies, and cruise lines have seen their share price decline. We should take that just as an indication of a possible impact, but not yet a deciding factor.

Now at this stage, Lynch already had redemption's to meet. So he had no choice but to sell. We are a little more fortunate in that we can hold on. But we should only hold on to our risk tolerance level.

William O'Neil has been a long time advocate of an automatic stop loss on all your positions. And I think this is an excellent approach.

Set a stop loss say 7% or 10% below the current market level. If the crisis continues, you may be stopped out. Long before you could know the full impact of this disease.

But if we are all lucky, and the Coronavirus turns out to be less of a threat than it looks currently, then our portfolio would continue on unscathed.

So just remember, as investors we strive to be like Peter Lynch, takes such action as needed, then continue to reevaluate as more information comes available.

Right now, during these first few days of the Coronavirus, information is limited. We do know that this has the potential to be a significant worldwide threat.

Setting a mechanical stop loss will limit our risk, until we can develop a new updated strategy based on more information.

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