COVID-19 & Your Investment Portfolio

The past couple of weeks have been the most insane period many investors have ever witnessed. The media has done a great job reporting it, there’s a lot of information out there. A lot of us are concerned and we should be concerned.

However, at times like these, we need to examine the facts. The fact is that COVID-19 is an event. It’s not structural, it’s not fundamental. And because it’s an event, we have to look back in history and we know how events like recessions eventually turn out. It’s not an “L” chart – markets don’t get knocked down and stay stagnant. But rather, it is a “U” or a “V”.

What you need, is to be very vigilant about your risk budget – making sure that you’re taking appropriate level of risk always make sense, especially in times of heightened volatility and the volatility we see now is probably going to continue. I believe we may possibly be down as much as 50% from the highs, similar to the financial crisis of 2007-08.

At this point you may question – why don’t I just get out and then get back in? Well, two reasons:

  1. First of all, you can be wrong. (I’ve learnt this the hard way at the beginning of my career.)
  2. Secondly, you would really have a hard time getting back in and the market does whatever it needs to do to prove people wrong.

Stock market volatility is akin to a roller coaster ride, it is dangerous for investors to unstrap themselves suddenly during the ride. Instead, during this period, it is advisable for investors to stay strapped in (invested) and average down the costs of investments in order to benefit when markets go up again.

To this day, I see people who got out in 2009 and never got back in – they missed a complete 10-year bull market. Warren Buffett has said, “The stock market is a device for transferring money from the impatient to the patient.”

And why will the markets go up again?

Historically whenever a recession happens, all of us – billions of human beings worldwide – always put in the collective effort needed to bring up our global economy again. 

In fact, governments are now doing all they can to ride us through this storm. The Federal Reserve has cut interest rates down to 0 – 0.25% to support America’s biggest corporations in meeting liquidity needs. The Bank of England has announced a similar plan. The International Monetary Fund has also pledged to mobilize its USD1 trillion lending capacity to help nations counter the outbreak.

So, don’t get caught up in the short-term emotion and the noise. Take care of yourself. Take care your family. And if you have an investment portfolio with me, rest assured that I’m paying attention to your portfolio during this period. If it needs to be re-balanced (when your equity-to-bond ratio shifts 20% or more), I will contact you promptly for a discussion.

Average is pretty good

If you’ve actually heard the term “dollar cost averaging” before, then you’ve probably some experience in the world of investing — or at least have begun your research.

If this is new to you or you’re still trying to figure out what it is, let’s look at some names that might actually make more sense:

“The Kick Fear in the Face Approach to Investing”

“The Refusal to Time the Market Because That’s Cray Investing Strategy”

“The Buy Every Month and Don’t Worry About the Price Investing Strategy”

Okay, so maybe these terms don’t exactly clarify the meaning either, but at least they get to the heart of the matter.

Dollar-cost averaging is an investing strategy where you invest a fixed amount of money over a period of time so you don’t have to worry about buying into the stock market at the wrong time.

What’s the Deal With Dollar Cost Averaging?

Trying to make money through investing requires two things: buying in at a low price and selling at a high price.

Simple, right? Pay less, sell for more, turn a profit.

Of course, the term “low” or “good” as it relates to prices in the stock market are relative. Who’s to say what a good price even is?

That’s something most of us don’t discover until later after we’ve seen the value on our investments go way up (or way down). And those numbers can change on a daily basis.

Enter dollar cost averaging.

Developed to mitigate the risk of entering the stock market at the worst time. This strategy says forget about price.

Instead, simply buy in at the same time and amount every month and, eventually, the average price you pay will even out all the bumpy fluctuations that happened over the year.

It allows you to get off the stock market price roller coaster and instead, focus on things that actually matter.

Cash Is Still the Riskiest Investment

If you avoid the stock market because you’re afraid to lose your money, consider this:

Thanks to inflation, the value of cash will decrease over time. That means you need more money in the future to buy the same thing you could today, for less.

Even with the volatility of the stock market, historically it increases significantly over the long-term.

So if you’re keeping your entire life savings in a bank account, the value that your dollar holds (meaning how much it can buy) will go down over time, even as your savings increases.

If your goal is to invest but you’re nervous to do so, dollar cost averaging is the most user-friendly way to get your foot in the door.

At the end of the day if you have room in your budget to save money each month, getting some money into the stock market is better than waiting until you land on the perfect time or perfect strategy.