A bear market by definition is stocks falling 20% from their peak. US equity markets barely escaped the feat in Q4 2018 and the bull markets continued into 2019. But then, coronavirus pandemic did what the US-China trade war and the Fed’s rate hikes couldn’t. US stock markets entered into a bear market and it’s the fastest on record in terms of numbers of days taken by markets to fall 20% from their peak. So, what learnings can we draw from the current bear markets and the almost certain recession?
Second, you cannot time the market. Not many fund managers sold before the 2008 crash and the same holds this time around also.
Third, investors should focus on asset allocation. This means having some of your money in instruments like debt and gold.
Fourth, always have a contingency plan. You should ideally have six months of your monthly expenses in safe assets. If six seems a far ask, four is the bare minimum that you should strive for.
Learnings from the Covid-19 pandemic
The Covid-19 is turning out to be more of a financial crisis that the health crisis. While some Perma bears have been screaming a recession for the last several quarters, the current crisis is a typical black swan event. That not to say that stock market valuations hadn't started to look high even before the pandemic. Multi-year high stock market valuations possibly made the stock market crash even worse. The global economy was not in the best of the health and macro risks were building up. Last year, the global debt to GDP ratio touched an all-time high. But then, such sell-offs at times teach us something.
One of Warren Buffett's famous quote is "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful." If you invested for the long term, and the pandemic does not change the long term outlook for the companies that you invested in, the fall in stock prices could be an opportunity to add more. Also, it is always advisable to stagger your purchases. Also, remember that age-old mantra, time in the market is more important than timing the market. As for timing the market, you can do it right occasionally, but not even the best of fund managers have been able to do it consistently. The best approach is to not time the market and invest regularly in good quality stocks.
Asset allocation is a fashionable term. To be sure, even Warren Buffett is not a fan of debt and gold and sees them as yielding too little. But then, dynamic asset allocation can be your savior in such times. At least a portion of your portfolio would have been sitting pretty if it was invested in other assets. What’s better, you would have had the optionality to move some money from other assets into equities.
Such crashes also emphasize the fact that equity investments by definition are long term. We can have our own definition of the long term. I remember meeting a client in 2007 who said holding a stock for a month is long-term! While textbooks might have a different answer, any money that you intend to take out in the next five years should not be in equities. Treat your equity investments as a lock-in for five years on a mental level. This, however, does not imply that you should not book profits or exit duds. But there has to be a reason to sell the stock. Just like you have a reason to buy a stock. Just for the record, such crashes are generally buying opportunities.
The lockdown and shutdowns have led to a job crisis. Having a contingency plan is possibly at the root of personal finance. After all there is no point saving for retirement if you find it hard to meet your finances if laid off. Having six months of your monthly expenses in a low-risk liquid instrument can be a savior in such times. Not only would it save you from a lot of stress but in all probabilities, you would be less tempted to sell your equity investments to meet your needs.
In the end, don’t forget to have a life and health insurance cover. Life is uncertain. If you did not already know, the Covid-19 exemplified it. But then, would we learn from the crisis or would it be business as usual? Having seen the 2008-2009 financial crisis, I would be inclined to believe that this time would be no different and it would be business as usual even after the Covid-19 pandemic dies down.
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