Coronavirus and the Uncertainty That Lies Ahead
Now I don't have a great crystal ball but it appears there may be a lot of fear about to spread through the markets based on coronavirus containment efforts apparently failing. I’ve invested through the dot com crash (not so well as a 24 year old) and I invested through the global financial crisis (quite well thanks to hard lessons learnt with my own money). The last 10 years have been easy pickings for investors but turbulence always comes along. I don’t know if it’s going to be severe turbulence or a bit of a false alarm and nobody else does either but here are my professional insights.
What am I doing with my own money? I hadn’t even thought about it until writing this but it might be a good honest way to start. It never crossed my mind to sell any funds or shares. I don’t need the funds in the next 10 years so, I’m diversified and invested in funds and companies I believe in. Racing for the exit and then trying to time my way back in would just be putting me onto a path of emotional decisions, and there is a good chance the market would eat me alive as I try to weave out and back in. If you are on a plane and encountering severe turbulence the best thing to do is belt up and just sit in your seat, and maybe have a stiff drink. It’s the same with investing.
If you were unlucky enough to invest $100,000 in an index fund on the edge of the 2008 global financial crisis at the worst possible time in about 100 years you would have had to watch your investment shrink to $60,000. If you were inhuman enough to stay invested, that $100,000 would be worth well over $200,000 now. In this case the investments were good even with the worst timing possible, but in most cases people didn’t hang around for the investment to come good. The old saying in the industry is “I don’t have people with investment problems, I have investments with people problems”
What do I do if I am about to invest a lump sum? If you are set to start out and invest a significant amount, you will feel overwhelmed by the upcoming newsflow. I would do the following right now to take the edge off:
Just average your way into the market. If you’ve got $100k to invest I would split it up into 10 equal deposits over 10 months knowing that if the market craters you will be buying more for your money. Don’t think of your first $10k as an investment you must make a return on as you are going to get the average over the next 10 months with your $100k. There is no golden rule about averaging your way in about how many months to split it over. The main thing is that you take the emotions out of it, write down an investment plan that you can live with, and then stick to it. Following a plan is more important than the actual plan itself. If fear leads you to inaction, that will cost you big. If fear leads you to a point where you sell out of your investments in order to make the pain stop, that will cost you big as well. Nobody is going to ring a bell to tell you it is safe to get back in and if they did, it would be at a point where the market has gone much higher.
Reassess your asset allocation. It might have felt nice and easy to go for a bit more growth but it might be smart to go a bit more defensively as you build confidence. More in fixed interest and less in shares/stocks. Doing this combined with just averaging your way into the market is a good double play to take the edge off and get you moving forward with a margin of safety. To be honest, investing a full lump sum right now all into shares/stocks is probably going to provide the best return of all, but investing is not about spreadsheets and probabilities, it’s about humans who can’t afford to lose their money, who are designed to flee from danger in order to survive. If you can feel comfortable you will behave in the right way, and your behaviour is the single most important aspect of your investing success.
Invest in the right things in the first place. Going back to the well used plane turbulence analogy. If you find yourself in mid air having a bit of a roller coaster ride, you will want to know you are in a good safe aircraft, with good pilots. Your palms might be a bit sweaty for a while but you’ll still get to your destination. Examples for me of “good safe aircraft” are:
Berkshire Hathaway: Warren Buffett’s company holds about $130b in cash in order be greedy when others are fearful. They hold no debt. Their investments are profitable in terms of cash and inexpensive. This is an aircraft that is designed with rough weather in mind. They did a great job of being greedy in 2008 when companies were being sold off indiscriminately. To be fair Berkshire still got smashed in 2008 because people lost sight of quality but the company did excellent work during this time, and they rebounded big. Just google “Berkshre Hathaway stock chart” and you will see what I mean.
Ultra diversified funds: History shows us anything can happen to one country. Many countries have lost 90% or more of their market value at a point in time but that won’t happen across all the countries. The key is to not be too exposed to one country. New Zealand represents 0.33% of the world economy yet many NZ investors will have 40% or 50% of their funds invested in New Zealand. It’s way too much. It’s called home bias and it’s adding risk that you don’t need to take.
Funds based on Fundamentals: Low cost index trackers are wildly popular right now but they invest into companies based on how big they are. It’s a strategy that is good for reducing the amount of emotional mistakes investors can make, but not my choice. I would rather be in a tracker that allocates funds to a huge amount of companies based on fundamentals like how profitable they are and how cheap they are priced. It maybe doesn’t matter so much in good times when large companies are becoming more and more valuable, but eventually valuation matters, and in rough weather I would much rather have more of my money allocated to profitable and cheaper companies.
I want to be greedy when others are fearful. How do I do that? You would be better off owning Berkshire and letting them do it for you as it’s not their first rodeo. If you do fancy yourself as a Wolf of Wall Street, then be aware that you might be attracted to buy into the eye of the storm and that’s a mistake. What I mean is that in 2008, a lot of stock pickers were attracted to the companies that were being hit the hardest like banks, and the thinking is if they’ve dropped so far, they will eventually come back the most. The problem is the banks had a capitalisation problem and the shares in the banks just became more and more worthless. So don’t buy the worst hit, buy the companies that are more protected and not in your newsfeed and chances are in a real crash they would be sold off indiscriminately yet their long term business was no worse off.
Now I don’t know if there is a market crash, a correction, or a bit of noise for a few weeks and then everything goes back to normal. Nobody does really, but the thing is if you are well diversified, have your asset allocation right, and you’re not in frothy investments, then your investments will get you to the destination you need to get to. Don’t buy or sell based on todays newsflow. Be invested in an approach that is proven to work and then stick with it.