7 Basic Principles to Follow when Bracing for Impact
Recently, I have fielded questions from several people outside the financial sector concerned about their stock portfolios during the coronavirus crisis. Here are my thoughts:
Over the past two weeks, stock markets in the US have been more volatile than at any time since the Great Depression. Asian governments generally have been proactive in controlling the virus, but the US and Europe have been woefully behind the curve and thus forced to focus on containment and treatment; they’ve squandered any opportunity for prevention.
While we are still in the early stages of the pandemic, the worst-case scenario of hundreds of millions infected, with millions of fatalities, could make the market’s current drama seem insignificant by comparison. It seems unlikely that a vaccine will be developed—and distributed worldwide—faster than the virus spreads, so it’s all about humanity’s commitment to ‘flattening out the curve’.
The world’s economy is coming to a standstill. It is safe to assume that the US and Europe are already in recession. Most likely, the worst economic effects of the crisis will become evident in the second quarter of 2020. In the US, there is a real danger of a double-digit contraction in the growth rate, as well as an increase in the unemployment rate into double digits. Such profound shocks to the global economy haven’t been fully factored into stock prices yet, so the market’s volatility over the past two weeks could be just a mild warm-up for a crisis that awaits.
I suggest a few basic principles to keep in mind as you manage your stock investments over the coming months:
I. The main factor in determining your market strategy is your portfolio’s investment horizon: how soon will you need to access that money to cover day to day expenses? Most non-professional investors won’t need to cash in until retirement, and then only in small, steady increments over a long period of time. If you don’t need the cash for at least another year or two, then it’s best to ride out what is likely to be a relatively short-lived crisis.
After thirty years’ working in all of the world’s major financial markets, I’ve battled through my share of global financial crises. There is one silver lining this time: The coronavirus crisis should be of limited duration, and the subsequent economic recovery should be rapid and steep.
Over the coming months, your stock portfolio is almost certain to continue to lose value. Over the long term—when you will actually need to use the money—your stock portfolio is likely to have recovered and flourished. Sometimes the hardest thing is to do nothing.
II. Make sure your stock portfolio is diversified. Some listed companies will go bankrupt as a result of this crisis, so you don’t want too much exposure to any single stock.
III. Many investors use a temporary market dip as an opportunity to rebalance their portfolios in favor of specific companies and industrial sectors that are expected to benefit disproportionately from the subsequent recovery.
IV. Resist the urge to try to ‘trade’ your way back to profitability. When the market is up or down 10% in a single day, it’s natural to think, “Man, if I had bought or sold yesterday, I would have made a killing’. Don’t do it: the current dramatic ups and downs of the market are just noise--the desperate overreactions of traders who grasp at any bit of news out of fear of missing the big opportunity. Even the most seasoned Wall Street traders don’t know how this will play out from one day to the next. Neither do you nor I.
V. Many cash-rich investors will rightly see this downturn as an opportunity to increase their stock holdings. Don’t worry too much about timing perfectly your purchases of additional shares at the market’s ‘bottom’: if you believe that the market will eventually recover to much higher levels—a pretty safe bet--it’s OK if new positions suffer some price volatility until that recovery solidifies.
VI. If your investment horizon is very short-term, that is, if you need to withdraw the money in your portfolio before the market has had time to recover, then the situation is much more complex; speak to an investment professional to identify alternatives (e.g., borrowing against securities) before selling any of your current holdings at steep losses.
VII. On a separate note, I’ve had a few friends ask if it is safe to maintain checking account balances in US banks during the crisis. As long as your bank deposits are FDIC insured, you’ll be fine--it wouldn’t hurt to double check your bank’s coverage. Your cash is a lot safer in an insured bank than it would be under your mattress.
Of course, the main focus over the coming months should be the physical well-being of your loved ones. Stay healthy, enjoy the down time with your family, and do whatever you can to ‘flatten the curve’.
Gregory Testerman is CEO at Testerman Advisory, LLC, a firm providing Sustainability and ESG (Environmental, Social, and Governance) consulting services to emerging markets banks.
Disclaimer: Nothing on this Blog constitutes investment advice, performance data, or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. You should not use this Blog to make financial decisions, and you should seek professional advice from a professional who is authorized to provide investment advice in function of your particular financial circumstances and objectives.