Zen and the Art of Portfolio Maintenance – Investing Daily

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As I write this column Monday morning, stocks are in a funk. How should you respond? By doing nothing. Let’s explore the wisdom of non-action.

Over the past weekend, I re-read one of my favorite books: Zen and the Art of Motorcycle Maintenance (1974) by Robert Pirsig. On the surface it’s the story of a motorcycle journey taken by a man and his son, but on a deeper level it’s a meditation on the nature of reality. This quote jumped out at me as applicable to investors:

“Mountains should be climbed with as little effort as possible and without desire. The reality of your own nature should determine the speed. If you become restless, speed up. If you become winded, slow down. You climb the mountain in an equilibrium between restlessness and exhaustion.”

Okay, grasshopper, allow me to apply those words to your portfolio. It means you should stick to your long-term goals. Don’t get distracted by impermanent emotions or obstacles. Pursue wealth-building with mental discipline, one step at a time.

On Monday morning, the three main U.S. stock market indices all opened deeply in the red, as coronavirus cases continued to rise in China and around the world. The concern is that the outbreak will hurt economic activity. In early trading, the Dow Jones Industrial Average was down about 500 points, dipping below 29,000. Tourism stocks, in particular, were getting slammed. My advice: sit tight.

The wisdom of restraint…

Zen and the Art of Motorcycle Maintenance is the best-selling philosophy book of all time. From time to time, I return to this book for spiritual sustenance. Among its teachings is the effectiveness of non-action.

Let’s apply that idea to the investment world. When in doubt, doing nothing is sometimes your best bet. Investors typically act too quickly to a big drop in the market…and they almost always do the wrong thing.

On a fraught day like today, you should control your emotions. See how events pan out. Never sell into market weakness. The 24/7 Internet-fueled news cycle has a way of exaggerating certain events out of proportion. Stick to the hard data. Avoid the predictable knee-jerk behavior of crowds.

When you’ve been investing long enough, you’ve seen it all before. The coronavirus death toll has reached 81 in China and I don’t want to minimize the human suffering from the outbreak. However, as with previous pandemic scares, the markets are likely to bounce back and soon return to normal.

Coronavirus concerns weighed on stocks last week, too. The three main stock indices closed lower for the week, a breather after the robust performance we’re seen year to date. We witnessed consolidation after a series of record-breaking highs.

We’ve been enjoying the so-called January effect, which is the seasonal rise in stock prices during the first month of the calendar year. This recurring annual rally is generally due to an uptick in buying, which follows the decline in prices that typically occurs in December when investors trigger a sell-off by deploying tax-loss harvesting to offset realized capital gains.

Global markets, especially in Asia, took hits last week because of worries about the coronavirus outbreak in China and its spread to the U.S. There are more than 2,700 confirmed cases of the deadly illness.

Oil prices also fell last week, the most in a year, on fears that the outbreak could undercut demand for fuel. Modern history shows these outbreaks don’t exert lasting harm to economies and markets, but amid these lofty valuations investors have been looking for an excuse to step back.

Waiting for the dust to settle…

If your portfolio is properly positioned, you have the luxury of just sitting back and waiting for headline risk to subside. Make sure you’ve increased your exposure to defensive sectors such as utilities, health care, and consumer staples. For our list of the best high-yielding utilities stocks, click here now.

To date for the fourth quarter of 2019, the S&P 500 is posting a year-over-year decline in earnings per share of -2.1%. Negative earnings growth and shrinking net profit margins are genuine causes for concern.

Read This Story: Decoding The Profit Margin Riddle

Investors are cheered, though, by the phase one U.S.-China trade deal that scales back some tariffs and compels China to buy more American agricultural goods.

Wall Street also is encouraged by the United States-Mexico-Canada Agreement, or USMCA, that replaces the NAFTA trade pact. President Trump is scheduled to sign USMCA this Wednesday during a ceremony in Washington.

I’m not impressed by either trade deal; I think they’re more political theater than substance. But on Wall Street (as in life), perception is sometimes more important than reality.

Stocks modestly retreated last week, but they’re still up for the year. A confident consumer, an ostensible ceasefire in the global trade war, and recent signs that the global economy might not be as bad as feared are all reasons to remain cautiously optimistic about stocks in the first half of 2020.

What’s more, the Federal Reserve has made it clear that it stands ready to lower interest rates again if serious cracks start to appear in the economic recovery.

Over the past decade, the S&P 500 has returned more than 250%. But along the way, investors have had to endure lots of ups and downs and scary moments.

Keep your eye on the mountain’s summit. And if you get spooked by a headline…just keep climbing, one foot in front of the other. You’ll get there.

Questions or comments? Send me an email: mailbag@investingdaily.com

John Persinos is the editorial director of Investing Daily.

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