Risk Avoidance

In the insurance world, the best way to mitigate a risk is to avoid it altogether. Don’t want to get hit by a hurricane? Live in Nebraska. Don’t want to be flooded out? Live on high ground. Don’t want to get in a car accident? Don’t buy a car and live somewhere where you can walk anywhere to satisfy your needs. You get the picture.

Stay Home

It’s the same way when it comes to Covid. Don’t want to get sick? Stay home and minimize or eliminate contact with other people. Have your needs delivered to your front door. As I continue to talk to people, there are still a lot of people out there who are still extremely reluctant to venture outside of their own homes. Discussions of therapies, vaccines, mask-wearing and politics aside, staying home and avoiding the risk of coming into contact with someone who might be contagious is the best way not to get sick with Covid.

The Problem

While this approach may work for you or your family for some period of time, the problem with it is that if everyone stayed home until the All Clear siren wails, then the economy would substantially collapse. This is why the US GDP declined by nearly 33% during the 2nd Quarter of this year – a lot of people were ordered to stay home and so commerce wasn’t getting done. Risk avoidance in a collective sense is not a sustainable strategy. Too many people would lose their jobs and there isn’t enough government money to make up for the collapse of private industry.

Common Problem

The concept that what’s good for one individual is not necessarily good for the whole of society is common. For instance, it may be good for you to sell all of your stocks and move 100% to cash, but what if everyone did that? There would be no investment in companies, which means there would be no companies, and a lot of people holding on to a lot of cash with nowhere to spend it. Afraid of flying? Then don’t fly, but if nobody flew, it would be really bad for the economy.

Trade-Off

There needs to be a trade-off in order to get people back employed and the economy moving forward again. The ramifications of this trade-off continue to work themselves out every day in the stock markets. People collectively are more risk-averse now due to Covid, and so the ups and downs in the stock market are substantially about how it is perceived that people are ready to undertake more risk with their own health in order to get back to work and return to spending at or near the level they were at prior to Covid. Of course there are other issues involved – Presidential election, stimulus bill, individual company management issues – but the shifts in the economy as we move through Covid and how and to what extent consumers reengage going forward and what individual corporate earnings will look like is the most important issue for the stock market.

IMO

Complete risk avoidance may work for you but it is not sustainable in the whole for a long period of time. If you in a high-risk group with respect to your health, then do what’s best for you. However, if you have no comorbidities, then consider what ramifications there are to society and the economy as a whole if everyone else followed your example. People’s jobs, incomes, and lives depend on commerce, and so we should all consider that as we make our decisions as to how to act in the face of this Covid pandemic.

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