Instead of following the crowds and putting yourself at risk of emotional contagion, stop and ask yourself what has changed about your long-term investment plan over the past few weeks. (UBS)

Wharton Business School professor Sigal Barsade believes the widespread panic around the COVID-19 virus is a form of emotional contagion. She says emotional contagion happens all the time on a micro-level and is usually harmless, like a baby smiling back at a smiling adult, or a yawn that ripples from one person in the room to another.

But "at the macro-level, emotional contagion can be dangerous because it can interfere with making sound, logical decisions."

Even though current research suggests that many people won’t contract the virus, a much higher percentage will experience emotional contagion, Barsade says. " That can lead to a surge in worry, anxiety and fear."

"That effect can be amplified by disinformation and what scholars describe as 'echo chambers,' where individuals only expose themselves to online information that they agree with and disregard other points of view," Barsade says.

These behavioral considerations also translate over to the financial side. Behavioral finance is an important concept for investors, because it helps us explain why markets don't behave rationally.

Right now, the reality is that we still don't know what will happen next in financial markets. We still don't have all the information about the virus, how long it will last, and what the fiscal or economic response will be.

Michael Crook, Head Americas Investment Strategy, says that "admitting ignorance about the future environment doesn't mean ignorance about what to do."

Crook says we should "put the crystal ball aside, and start doing things that make sense in an environment of extreme uncertainty."

"Don't take big directional bets. Rebalance. Loss harvest if you can for taxes. Add high quality cash-flowing companies that can survive the worst case recessionary conditions. Add momentum/trend following strategies that will protect in a sustained downturn. It doesn't require a prediction to observe that volatility is at the same levels we saw during the financial crisis."

"Remember, admitting 'I don't know' is a signal of competency. Operate within that competency," he concludes.

Instead of following the crowds and putting yourself at risk of emotional contagion, stop and ask yourself what has changed about your long-term investment plan over the past few weeks. The ups and downs of the markets can be painful, but try to avoid letting near-term volatility or events steer you away from achieving your long-term objectives.

It's not easy to feel in control at the moment, but UBS Research has found that taking an active role in long-term financial planning actually reduces financial stress, and is empowering.

A key part of UBS's Wealth Way* focuses on owning your worth. It lists a few questions to help you know where you stand and what you want.

  • What do you want to accomplish in your life?
  • Who are the people who matter most to you?
  • What do you want your legacy to be?
  • What are your main concerns?
  • How do you plan to achieve your life’s vision?

By taking the time to add up your assets and liabilities, like loans, credit and other debts, you can then be better prepared and educated on how to make it through any difficult time ahead.

At that point you are then able to think about your wealth along three key dimensions:

Liquidity—to provide cash flow for short-term expenses. Longevity—for longer-term needs and Legacy—for needs that go beyond your own.

The 3L framework isn't a panacea for solving emotional biases, but provides guidance for action during difficult periods, and can help you maintain focus when the market becomes emotional.

As Barsade points out "stemming negative emotional contagion — and making positive emotions more infectious — will make us feel more prepared and in control during this frightening period."

Main contributor: Joe Melvin

*UBS Wealth Way is an approach incorporating Liquidity. Longevity. Legacy. strategies that UBS Financial Services Inc. and our Financial Advisors can use to assist clients in exploring and pursuing their wealth management needs and goals over different timeframes. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved. All investments involve the risk of loss, including the risk of loss of the entire investment. Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability.