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Automation's role in COVID-19 market panic
BY WILLIAM JOHNS | TUESDAY, 17 MAR 2020   1:16PM

If you read the news, you will no doubt start feeling a sense of panic. Headlines such as 'About $130 billion wiped off Australian shares' can really set fear in anyone's heart, especially if you are in retirement or close to retirement.

The drop is on the back of extraordinary growth that has made the world economy fragile, and a lack of preparation for natural disasters and pandemics that can travel quickly thanks to cheap and accessible global travel. However, there is one reason for the volatility and sell-off that hardly anyone talks about; automated machine trades and algorithms.

Over the past few years, I have noticed many of my friends who were in funds management leave to work as program coders. Essentially, they program very fast computers to do their bidding based on algorithms they create.

They are often paid well for this job. Fund managers and stockbrokers know if they want to remain competitive they need an edge. That is often found by investing in fast, powerful computers, coded by smart people with algorithms that can trade quickly on their behalf.

Those powerful machines analyse market sentiment such as news and Twitter feeds and trigger an automatic response.

For example, if they detect negative news, they sell. They can also be coded with a specific rule to sell when the market drops a certain percentage.

So, you have a multiplier effect that has the potential to drive the market down, and sometimes substantially so.

In an article by CNN from 2018, a fund manager admits that 80% of the daily moves in US stocks are machine-led.

Just imagine how many trillions of dollars are at the mercy of those machines.

Machines sometimes get it wrong when they misinterpret the news. In 2013 someone hacked one main news source and highlighted just how stupid those machines can be.

There was a Twitter feed saying Obama was injured in White House explosions. One false twitter feed caused an entire index, the Dow Jones, to fall.

The issue was fixed in a few minutes but the damage was done. So, how did the reaction come so quick?

Many experts blame this solely on machines not distinguishing what is right and wrong and simply triggering a sell.

Is there rational when machines are racing to the bottom? I doubt it. However, the real lesson is understanding how fragile our economies are to outbreaks and I sincerely hope this lesson will not be lost on lawmakers for years to come.

Personally, I am not making light of the coronavirus or the impact economic downturn has on all of is. I care for a family member who is at high risk.

I pulled my son out of daycare and I am no longer seeing clients face to face. All this is putting a lot of pressure on my personal and business budget. But, the reality is nothing lasts forever.

China is already re-opening its main business hubs and major attractions, such as Disneyland which was reopened as cases slowed down and the disease was contained.

I hope you understand that panic selling is a bit like panic buying of toilet paper. You will realise how silly it is only after the fact. Woolworths was the first to decline refunds to the hoarders. Good.

However, there is something to take out of this that is of importance:

Have enough safe and defensive assets in your portfolio that will see your pension payments funded

Use reputable fund managers who can react quickly and take advantage of the situation

As a business:

We avoid investing in direct stocks and we diversify across a broad range of quality fund managers that invest across quality assets to manage risks.

We advocate and construct portfolios with enough defensive assets that can withstand very long periods of downturn, and you may even take advantage of the falls.

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