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Managing Your Money During The Coronavirus Crisis

Managing Your Money During The Coronavirus Crisis

Financial expert Michel Fleuriet, explains how to manage your investments during the crisis and the importance of letting professionals make major decisions.

What you can do about your investments during the coronavirus crisis? Follow the instructions of Circe to Odysseus (Ulysses). You may remember The Odyssey, Homer’s tale of Odysseus’ homeward journey, after the Trojan War was over. At one point, the goddess Circe warns him about the Sirens who enchant all who come near them and warble him to death with the sweetness of their song. “Therefore, pass these Sirens by, and stop your men’s ears with wax that none of them may hear; but if you like you can listen yourself, for you may get the men to bind you as you stand upright on a cross-piece half way up the mast…”

With the coronavirus epidemic intensifying, investors grew worried about the impact of the crisis on the global economy. In the financial markets, many massively sold their stocks to buy bonds or gold. This global movement led to a general fall in stock prices. History has taught us that you should never lose it and succumb to the temptation to sell when markets are crashing. Following Circe, I would like to give you three recommendations: First, pass these sirens by and keep your investment strategy. Second, let the professionals to deal daily with fluctuations for they do not listen to the sirens’ songs (even without wax in the ears). Third, if you are one of those who cannot bear to see their investment portfolio depreciate, tie yourself to the market by investing in market-tracking index funds.

Stay the course. Many investors build their portfolio for retirement and they have developed a strategy of diversification following the rules explained in my book “Investment banking explained”, Chapter 17 (The Businesses of Private Banking and of Investment Management).  The worst move here would be to change your strategy because the market is crashing. Violent swings do not present opportunity. They are like the songs of the Sirens that you should feel free to tune out. A market crash matters little if the investment is long term; in 20, 15- or 10-years, chances are that the markets will have risen again, and the fund will wind up generating capital gains. Time does not respect what is done without it.

Let professionals make the decision. Trading during a time of extreme volatility means knowing when to buy in as well as when to cash out. See “Investment banking explained”, Chapter 8 “The Strategies in Trading”. The 2,353-point drop of the Dow Jones on March 12, 2020 was the worst single-day drop in history… until March 16, when the Dow fell 2,997-points! After March 24, the index gained 21% gain in three days, ending what was just an 11-day bear market. Only professional traders who can diversify the risks of being long or short by selling various instruments to their institutional and industrial clients, can act fast enough to take advantage of these volatilities.

Tie yourself to the market, be a passive investor. A passive investor buys market-tracking index funds and walk away. For the difference between active and passive funds see “Investment banking explained”, Chapter 17. According to Morningstar, only 23% of all active funds topped the average of their passive rivals over the 10-year period ended June 2019. The downside of passive strategies is that they can miss out booms or cannot avoid busts. For an investor, the choice between active and quantitative management hinges on market developments. In a bullish market, beating the passive approach takes a lot of doing. In a seesaw market, active management will be preferred. In a doom market be passive and try to ignore the financial news.

To read more from Michel Fleuriet, check out his book Investment Banking Explained, Second Edition.
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Managing Your Money During The Coronavirus Crisis

Michel Fleuriet was the Harry W. Reynolds International Adjunct Professor of Finance, Wharton School of Finance at the University of Pennsylvania, and the founder of Université Paris-Dauphine’s master’s program in investment banking. Prior to his career in academia, Fleuriet served as chairman of HSBC France, chairman and head of investment banking at Merrill Lynch France, and CEO of Chase Manhattan France. He was for many years a professor of finance at HEC and holds a PhD in law from the Université Panthéon-Sorbonne and a PhD in finance from Wharton. His principal experience is in corporate finance and mergers and acquisition.