COVID-19: an exercise in managing risk

Sonnie Bailey

26 February 2020

Pandemics terrify me.

I'm pretty sure that in my lifetime there will be a major pandemic that causes a sizeable loss of life and has a big impact on the global economy. (In September 2019 I made a prediction that there will be major pandemic that kills at least 1 million people worldwide by 2035, with 69% confidence. In retrospect I think I was under-confident.)

Maybe it'll be the coronavirus COVID-19. Maybe it won't be.

In any case, thinking about a potential pandemic is a good lens for looking at many of the themes of this blog.

(Warning: I am going to conclude this article by recommending that you spend more time washing your hands! I'll cover a lot of other territory. But you've been warned.)

No one knows for sure what will happen

One thing is for certain: no one knows exactly what will happen in relation to COVID-19.

There will be pundits who will talk about this topic with a great deal of confidence. Those are the sorts of people you tend to see on TV, hear on the news, or who will provide good comments for newspaper articles.

Some of these people might make pretty good guesses. If they get the general contours right, they'll probably take it as a win, even if they get some of the specifics wrong.

The bad guesses? They'll be forgotten.

The truth is, there are lots of different variables at play. There are second-, third-, fourth-, nth-order effects that will play into each other. There is reflexivity.

Having some degree of humility regarding what might happen is a good starting point.

But that shouldn't stop us from trying to make some predictions, and planning accordingly.

(Some other articles on this topic: How to predict the future. What will happen as a result of Greece? I don’t know. Neither do you. Nor does anyone, really. Future babble: why expert predictions fail and why we believe them anyway. Are we on the road to ruin?. The folly of predicting market downturns. You get the picture.)

How should COVID-19 impact your investment decisions?

In short: COVID-19 shouldn't impact your investment decisions.

Your investment decisions should be driven by YOU: your circumstances, needs, and objectives. More here.

The exceptions to this are (a) if COVID-19 is likely to impact you directly: as in, it will directly impact your personal circumstances, needs, and objectives. Or (b) if you are experiencing genuine anxiety and an inability to sleep at night, in which case you've learnt something about your tolerance for risk, which isn't as high as you thought it was. Maybe you should be investing more conservatively at all times.

Just don't think you'll be able to pop out of the market before it goes south, and trust that you'll know the right time to pop back in. More likely than not, you'll get the timing wrong. I recommend hurrying up and waiting.

You're not the only one concerned about the impact of COVID-19

If you're concerned about the impact of COVID-19 on your investment portfolio, you're not alone.

Some of the people who are probably most nervous are the investment managers who are responsible for hundreds of millions of dollars of other people's money. These people will be making investment decisions influenced by what they think will happen. This includes trying to work out not just the first-order effects, but the second-, third-, nth-order effects. They will be trying to make decisions based not just on their assessment of the short-term effects, but the long-term impact of COVID-19.

The reality is, it's these people, in the aggregate, who are making the investment decisions which influence the value of shares and the share market in general. In effect, the value of shares and the share market at any given time represents the consensus view (or "wisdom of the crowd") of these managers, building in their expectations and predictions about the future. They update their views based on new information (such as news of, and updates about, the COVID-19) almost immediately.

(For these guys and girls, there's real money involved. And real money is a tax on bulls#!t.)

By the time any individual (that's you and me!) makes a decision about whether they should get out of (or into) the share market, it basically reflects the consensus view of most professionals' predictions about the future, incorporating whatever information we have to inform our decisions.

(Will the share market reflect what exactly will happen? No. In this sense, I don't buy into the "efficient market hypothesis". But I do buy into the "inefficient market hypothesis": the market is inefficient, but you can't predict how. So it's not worth trying.)

If you're invested in growth assets such as shares, you should be invested for the long-term. If there's a downturn this year, your investments will probably have recovered by the time you need to access them. Sometimes these investments go up, and sometimes they go down. If you start making long-term decisions based on the whims of the day, you'll probably get what you deserve, not what you want.

What MIGHT happen?

I probably sound like a fatalistic when it comes to investing. Perhaps.

But at the personal level, it's worth considering what might happen. This is where scenario analysis and "strategic flexibility" comes in handy.

It's worth considering different scenarios that could happen, including possible worst-case scenarios. Most of them won't happen, but it pays to be prepared.

The best-case short-term scenario in relation to COVID-19 is that it's a storm in a teacup. It might even end up being a good thing, by creating greater awareness of, and public will for, pandemic prevention and preparedness. We can hope!

Michael Reddell of the fascinating Croaking Cassandra blog recently wrote an article titled "What if COVID-10 things get really bad?". He runs a thought experiment resembling a worst-case scenario: where COVID-19 infects "perhaps 40 to 70 per cent of the world's population... with perhaps 1 to 2 per cent of those dying. In that scenario... something from 0.4 to 1.4 per cent of the world's population dies".

I'm conflicted about these figures. For one thing, a fatality rate of 1% or 2% seems pretty low for a pandemic. Odds are, if you're a healthy adult, you'd survive. My understanding is that this is, however, exactly what makes COVID-19 potentially so damaging: other viruses, like SARS or Ebola, have a much higher fatality rate, but that means that people show symptoms and die before the disease can spread widely. In this sense, a lower level of virulence means the virus is likely to lead to greater spread, leading to more people dying in total and greater total impact on the world at large.

In any case, 0.4% to 1.4% dead still represents a lot of death. 1% of a global population of 7.8 billion people is 78 million people dying. That's somewhere between the population of the United Kingdom and Germany. 1% of New Zealand's population of roughly 4.8 million is 48,000 people. That's the population of Nelson or Invercargill. Those are long lines to heaven.

To create some additional context, New Zealand's normal death rate is around 0.8 per cent of the population.

(According to preliminary data at, vulnerability to COVID-19 is highly correlated with age. The death rate for people under 40 currently stands at 0.2%. For people 70 to 79, it's 8%. For people 80 and above, it's nearly 15%. No doubt, these stats will change.)

In Reddell's article, he provides some perspective which I find oddly encouraging:

"even if something this bad happens, in a couple of years time the crisis would be over and something akin to normality would have returned. Societies would no doubt still be scarred by the disruption – economic, social, and perhaps political – and by the utterly unexpected scale of the human losses..., perhaps in a way they don’t seem to have been in 1918 (coming off far greater death, destruction, and dislocation in the war). But borders would open, commercial premises operating, people free to come and go within countries as they like with no unusual fear etc etc. Health systems – potentially grossly overloaded during the crisis scenario – would be back to more or less normal either. In other words, most of the effects are temporary."

But, at least in the short-term, there is likely to be extreme uncertainty. As Reddell exlains, "the rational response to extreme uncertainty... is to postpone (travel, investment, discretionary spending), delay, stick close to home etc etc". (On that note, this week my wife and I cancelled a cruise we had booked to Fiji. (We've never been on a cruise before... we are withholding judgement on cruises... please withhold your judgement on us!))

Reddell explains how economic activity can be savaged: "Lots of people [would be] sick in this scenario, in many cases really quite seriously ill, and typically (it appears) not just for a few days. Those people will need people to care for them (not necessarily medically, but just the comfort we’d all want to offer to a seriously ill family member). And between voluntary and semi-compulsory pressures, not that many people with a sick family member are going to be welcome in the office/workplace for a while. More than a few employees will find hours drying up, or jobs disappearing altogether. Sure, people still need to eat... but there is a great deal of expenditure, business and private, that is discretionary (over a horizon of several months)."

It gets worse:

"Now assume – as the scenario requires – that this isn’t just about one country, but about a steadily increasing number of countries. And start factoring in the serious disruption to supply chains – which we are already seeing in and from China (and recall that a supply chain isn’t much stronger, in effect, than its weakest link) – and there is lot more economic activity at risk, even if all the workers were available and ready to work.

"In each and every country, lots of businesses – and more than a few workers – are going to be facing big drops in income. Initially each will like to think it is a matter of a week or two, but already that doesn’t really look like the China experience, and on this scenario, the problem has become worldwide. Plenty of businesses have debt or very very limited cash reserves and so lots of firms will soon be in the hands of their bankers."


"Quite probably there would be some real high profile company failures (or big state bailouts) going on – airlines anyone? – short-term earnings estimates would be being savaged, and risk spreads would be widening".

Reddell also mentions health systems - "potentially grossly overloaded during the crisis scenario".

This is just one scenario

The consolation is that the acute period is not likely to be long-lived. And this is probably a worst-case scenario. Hopefully the relationship between virulence and transmission rate isn't as bad as it could be. Perhaps vaccinations can be brought into circulation faster than expected. Maybe special treatment protocols will improve mortality rates.

And like I said, this may even be a storm in a tea cup. Maybe we don't get to pandemic levels. Or perhaps we do, but it's not much worse than the common cold. (Which is still pretty bad... but that's another story.)

Are you prepared, personally?

Are you prepared for a disaster?

In New Zealand, it's easiest to think of disasters in terms of natural disasters, and earthquakes in particular. If you're not prepared for an earthquake or similar, I encourage you to do so now! Make sure you have a first aid kit, food, water, batteries, etc. Treat this as a prompt.

One benefit of having a disaster plan is that it can cover a number of scenarios. One of these might be spending time "bugging in" at home to stay out of harms' way for a period of time. If there really is a pandemic, the very worst time for contracting a virus is at the same time as everyone else, where health system resources are being pushed to the brink.

(Did you know that the Centers for Disease Control and Prevention (CDC) in the US has a bunch of "Zombie preparedness" resources, including a graphic novel? It's tongue-in-cheek, but think about it: a fictional zombie outbreak mirrors the outbreak of an infectious disease. The CDC's "All-hazards emergency kit" checklist is a good place to start for emergency planning, pandemic or otherwise.)

Can you deal with short-term economic shocks?

If you're living from pay day to pay day, a shock of this nature could have a big impact on you. This is another instance where having an emergency fund is likely to be extremely valuable.

If you don't have emergency funds at the moment, this situation illustrates why you should try to build up funds for next time. Because there will always be a next time.

How resilient are you from a slightly longer-term perspective?

Let's say COVID-19 has reached pandemic levels. Even if the odds are on your side, you probably don't want to come down with it at the same time as everyone else.

For reference: Christchurch Hospital's ICU has 23 beds. In the three months to 3 June 2019 it had been full three times.

Spending time away from work, or keeping your kids away from school, might end up being a reasonable thing to do. It may even be imposed: I can imagine a scenario where schools are shut down.

Some households are more likely than others to be impacted by a shock like this than others.

Work that is heavily face-to-face and location-dependent may be more challenging to do, and have a more direct impact on income, in the event of a pandemic.

My mind comes immediately to my own situation: I'm fortunate, in the sense that so long as I have access to electricity and the internet, I can continue doing what I'm doing. I work with most of my clients remotely, and could do this with all of my clients. It wouldn't significantly impact how I operate my business, although I am not sure how demand would be impacted.

My wife, on the other hand, works in a specialist dental practice, which involves working with patients in close proximity. Dental practices operate with a high level of hygiene (gloves, masks, washing hands, sterilising equipment, etc) but there is still a much higher chance of infection compared to me. A reduction in my wife's income over an extended time would be a hit to us. Having said this, we would still be resilient. We have savings, investments, equity in our home, funds that we could access in KiwiSaver and Australian superannuation if we needed (hardship), not to mention the privilege of having family members who are in a reasonable financial position. We could weather a tough situation and so long as we retain our good health and society doesn't fall apart, it would simply mean our long-term financial and lifestyle plans would need to be recalibrated somewhat.

If we had an even larger emergency fund, or funds that we could access in investment assets, our level of resilience would be even higher.

Taking it a step further, a real sign of privilege is having somewhere less populated to go in the event of an emergency. Of course, there's the likes of US-based Peter Thiel who has a private jet, citizenship in a foreign land (<New Zealand>) and properties in New Zealand with panic rooms.

At a slightly more mundane level, there are people who baches in more remote areas, and the means to step away from work or work remotely, without running the risk of being in a more populated area.

This isn't something you can plan for in the face of an impending disaster, such as a possible COVID-19 pandemic. But it's something you can think about when making bigger decisions for the future.

An aside: thank God we live in New Zealand

I would hate to live in a country like the US facing a pandemic of this nature. What will happen to people who don't have health insurance and/or the means to deal with getting sick from a pandemic virus? From a personal perspective, I'd hate to live in a society where some people will be exposed to the worst without any support from a public healthcare system. And from a practical perspective, it seems like having a whole swathe of the population – who is also most likely to be the financially vulnerable and unable to take time off work, meaning they have to keep working, likely in close proximity to others – not getting treatment, and making the spread to everyone else much more likely. But I digress.

Wash your hands!

I've been a member of a number of Toastmasters clubs over the years and have listened to many talks. Of all of these talks, the most memorable one was about how to wash your hands. It was amazing! I'd lived all of my life up to that point and hadn't given it much thought. Up to that point, I hadn't been washing my hands properly!

You should wash your hands properly!

This is relevant in the face of a potential pandemic. It's likely that you will be exposed to vectors of the virus, which may or may not lead to you being infected. Taking steps, like practicing good hygiene, will reduce your likelihood of contracting COVID-19 and passing it on to others (if you have it and are asymptomatic).

(To bring it back to money: cash and coins are some of the most dirty things you'll ever touch. So, for that matter, are common points of contact, such as door knobs, buttons on photocopying machines. And don't forget your computer keyboard, your mouse, or your phone...)

This may seem like a pedantic recommendation. But have you ever consciously learned how to wash your hands? Do you spend 20 to 30 seconds washing your hands? If not, there's a good chance you're doing it wrong.

A few other things to keep in mind: make sure you dry your hands with clean towels. And resist the urge to touch your face if your hands might be dirty.

Maybe this seems like a waste of time. If you wash your hands 10 times in a day, that might be an extra five minutes each day I'm suggesting that you spend, washing your hands. Over the course of a week, that's 35 minutes. Over the course of year, that's over 30 hours.

But think of it from another perspective: if practicing good hygiene every day prevents you from getting a 4-day flu every three years, you've ended up ahead.

And pay it forward: you're less likely to infect other people as well, including people who may be more vulnerable to you.

Here's another perspective. In 2013, Jared Diamond (author of Guns, Germs and Steel and Collapse) wrote an essay for The New York Times"That daily shower can be a killer".

Diamond observed that falls were risky things for people of his age. (He was 75 at the time of that article.) He pointed out that if his risk of slipping was 1 in 1,000 each time he had a shower, he'd probably "die or become crippled about five times before reaching my life expectancy". (His conditional life expectancy based on his age was 90.)

He stressed the "biggest single lesson that I've learned from 50 years of field world...: the importance of being attentive to hazards that carry a low risk each time but are encountered frequently".

Diamond encourages his readers to adopt a "hypervigilant attitude toward repeated low risks", which he calls "constructive paranoia". He acknowledges that "it exasperates many of my American and European friends". But he also notes that some of his friends have learned his attitude, "as I did, by witnessing the deaths of careless people".

Every moment or unique interaction you have might pose a very marginal threat of being infected or infecting someone on to you. Reducing the likelihood is a good philosophy.

If it means that you reduce the likelihood that you'll contract a virus which could kill you – or that you could pass on to someone who could become very sick or die – then it's almost certainly worth it.

So: wash your hands!

Because that's what this blog is about - helping you manage risks, financial and otherwise, big and small.

I'd apologise for ending on such a mundane note, but you were warned! And sometimes the simplest things are the most important things.

To sum up: don't touch your face, and don't touch your shares 🙂

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