Timing A Crisis

The recent outbreak of COVID-19 has many investors stressed out!  They are second-guessing their strategies and placing blame on anyone and everything.  Seeing the DOW drop by more than 10,000 points in less than a month has many people saying what is going on?

Unless you are a member of Congress and are privy to inside information it’s impossible to know how the market is going to react to any given crisis.  With the fundamentals of the US economy being in as great of a shape as they’ve ever been, who could have predicted the impact of a virus that was beginning to wreak havoc in Wuhan, China?

For those of you who believe you can time the market unless you have a better than average track record of doing so, it’s safe to say you may have been wrong during this or any other meltdown.  Personally, I saw the writing on the wall during the 2007-2009 housing market crash. 

No income verification mortgages on properties purchased with no money down at 107% loan to value is a recipe for disaster.  Having the ability to foresee countries shut their borders and global economies collapsing with shelter in place orders enacted to try and prevent the spread of the virus?  Good luck with predicting that!

When the CDC declared the Coronavirus was a threat to the world and the Trump administration followed suit by immediately banning foreign travelers coming from China on January 31st the DOW stood at 28,256.  If you look at the beginning of the year when reports were just starting to trickle out about the illness, the DOW was at 28,868.  January 17th the DOW closed at a then-high of 29,348. 

Less than 2 weeks later it had shed 1,100+ points.

For anyone who got out of the market and went to cash, you might have second-guessed your decision over the next two weeks.  That’s because the markets rallied and closed to an all-time high of 29,551 on February 12th.  It wasn’t until 9 days later when the market closed at 28,992 that we were on the dawn of the biggest market collapse in over 30 years.  Had you been one of those investors who sold in January, and bought back in at the beginning of February because you thought you were missing out on the ride up, you most likely are either kicking yourself in the ass for not staying out and probably sold your stocks during a down market, securing any profits or losses you have.  Don’t feel bad, we’ve all been there!

As of March 20, 2020, the DOW is now at 19,173.98.  In the past month, we’ve witnessed historic daily swings in the thousands.  With the green and red lights signifying losses and gains going back and forth like a tennis match, it’s impossible to know when to get back in if you’re sitting on the sidelines and when to feel hope that the market will recover if you are in it for the long haul.  This is why timing the market is impossible.

The advice I’m going to give you needs to be taken with the understanding that it is general and not specific to you.  Each person has unique investment objectives and risk tolerance.  How you invest, should you decide to do so, should be done with the consultation of a trusted and competent financial advisor: preferably someone who is seasoned and has experience during times of crisis.

There are two types of accounts that I’m going to focus on, retirement and non-retirement accounts.  Unless you are an accredited investor and have the financial ability to make short-term bets utilizing options to minimize your potential losses, you should only make those types of investments in a non-retirement or day trading account. 

That type of account is designed for frequent daily and sometimes hourly trading.

When looking for investment opportunities in a short-term account seek out companies that have great fundamentals but are on sale due to panic selling.  The current Coronavirus crisis has taken a toll on the oil market. 

If you are financially savvy and are well versed in commodities trading, look for companies that are in that industry that present good buying opportunities.  If you are only looking to get in and out with half to full point plays, you will find plenty of fuel companies that are highly volatile to choose from.  Good luck!

For those of you who have witnessed your retirement accounts lose 30% or more in value over the past month, the following advice is for you.

Rule number one: DON’T PANIC!

Rule number two: NEVER SELL INTO A DOWN MARKET.

Rule number three: When you begin to panic and are tempted to sell into a down market that is free-falling because you are afraid of losing it all, you will lose it all buy securing that trade.  If you sold with a profit or loss, you will own that profit or loss.  Remember rule’s one and two and RELAX!

To be a successful investor you need to remain disciplined and remove your emotion from the equation. 

This is tough to do when the world is isolating itself and people are panicking. Fear of missing out is a real thing.  Remove your emotion and tell that fear to knock on someone else’s door.

Your retirement account should be diversified.  Many successful hedge-fund managers who are responsible for managing billions of dollars will be the first to tell you that it’s impossible to time the market.  If these career professionals with decades of experience are telling you not to time the market, why would you go against what they say?  Stick to what you are good at and leave games of chance for trips to the casino.

The Rule of 110.

This is a simple formula that will help to give you guidance on how to diversify your portfolio.  It is based on age and working years. 

Your risk tolerance will play an important role in how you invest.

Take the number 110 and subtract your age.  The sum should be invested in stocks, the difference in bonds.  For example, say you are 20 years old and new in the workforce. 

Your company offers a retirement plan with the ability to buy index funds. 110-20=90.  90% of your contributions should be invested in stocks and 10% in bonds. That’s based on the assumption that you have many working years left and can handle the risk.  Each year as you get older, those numbers will adjust.

Say you are middle-aged and mid-career.  That formula takes into account that you are willing to take some risk but are concerned about the preservation of capital.  We never know how long a down-market will last.  Someone who is just starting out has the time to wait for the market to recover and can absorb a huge loss.  The mid-career person has some working years left but does not want to work forever and wants to ensure they have a comfortable retirement.  This is why gradual shifts from equities to bonds are important.  You may not see the same large gains as those who have higher concentrations of equities, but you will also not experience the dramatic losses.  Highly volatile markets like the kind we’ve witnessed over the past month will make you appreciate this strategy.

If you are at the end of your working days and are getting ready to retire, this strategy will have gradually reduced your exposure to risk and in turn, preserve your hard-earned capital.  The best comparison I can give you is a roller coaster.  When you are young, you most likely loved the feeling of going high in the sky, dropping 100 feet in a second then being spun around like clothes in a dryer.  As you got older, you still loved going on roller coasters but maybe not that extreme. 

By the time you are a senior citizen, you may enjoy taking your grandkids to the amusement park, but most likely enjoy watching the crowd scream and yell while you sit on the bench eating ice cream.  That’s investing for the long term.  Every investment style has a time and place.  The younger you are, the more you can tolerate and even enjoy the risk.  The older you get, the less risk you are willing to take.  The bottom line is to never be mad about getting in an out at the wrong time. 

Stay the course and you will be fine.

Coronavirus Investing Stock Market

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