In the midst of record job losses, a devastating first quarter, federal rate cuts and government stimulus, it can be daunting to decipher the onslaught of economic advice. And without a clear understanding of COVID-19’s long-term impact, it’s unlikely anyone is as certain as you’d like them to be.
There are, however, inarguable signs of opportunity. Morgan Stanley monitors and identifies U.S. economic phases as a time of either ‘expansion,’ ‘downturn,’ ‘repair’ or ‘recovery.’ Their analysts have reported a switch in their indicator, from ‘downturn’ to ‘repair,’ indicating a move away from the worst part of the cycle and toward the possibility of forward-looking returns. Strategists predict a sharp rebound that mirrors the pace of the fall and a repair period that’s shorter in duration than it has been in the past.
Historically, the protocol for a repair period has been to add risk selectively. Credit performs well, and equities are mixed. Strangely enough, there is the common maxim that the market actually gets more secure as it seems to get less stable, and significant drops (exactly like this one) bring significant opportunity.
Overall, those insights are accurate and historically supported. Today’s losses present a real opportunity for those who have the available capital to bet on stronger future earnings. If you’re able to maintain or increase your portfolio, it’s likely a good idea to do so.
However, most experts agree: There’s more volatility ahead, and investors need to be prepared. If continued market losses will cause you to continue losing sleep, you need to adjust your strategy. Emotional control is almost impossible to depend on, and emotion-based investing at a time like this is like boarding the world’s largest rollercoaster without buckling your seatbelt. It’s not smart, and there are serious consequences.
Front page investment advice is not ‘one-size-fits-all,’ and of the many factors to consider, risk tolerance should be at the top of your list. If you choose to maintain or increase your portfolio, a strategy for remaining emotionally detached will no doubt be your greatest asset.
Take Yourself Out of the Equation
Decide on the math of your portfolio and let the numbers work. Automate your reactions to the inevitable market fluctuations, and try to take in only clear, numeric signals rather than the most recent headlines. What makes sense for you when the S&P is around 2800? 2500? Less? And what is the correct amount for you to keep on the sidelines in case we face a new low?
Dedicate a segment of your portfolio for riskier endeavors. The percentage allocation, whether 10 percent or 50 percent, should be a loss you could both mentally and financially survive, and the remainder should be concentrated in more dependable assets.
Rather than trust your “judgement,” consider the math of your stock selections. You can decide what you’re looking for in a balance sheet in advance. You can set minimums for the company’s cash flow and market share. Commit to only investing when the stock has reached or exceeded your empirical targets. With a process for categorizing the stocks you’re considering, you can compare the math of your options and ensure that your decisions are rooted in the logic of the numbers.
Account for Your Impulses
Whether it’s tomorrow or months from now, anticipate a lapse in judgement. This might look like panic selling, or a dip into your savings that was otherwise unplanned. Choose ‘safe’ areas for the capital to land, where the cost of an impulse is minimal. Bonds, despite their current low yield and high price, are a great insurance policy. Morgan Stanley lists bonds as positive in both the ‘downturn’ and ‘repair’ phases, making them largely immune to the fluctuations that may still be in store.
Though there’s little that anyone knows for sure, the opportunities to make the best of a bad situation are there for those who want to participate. In challenging situations like this, it’s not enough to want to keep your emotions out of your decisions. You need a strategy. Deciding on the math of your portfolio ahead of time and accounting for your impulses are necessary mental and financial safety measures. And if you’re in for the wild ride that is the 2020 market, you’d be crazy not to buckle up.
Zain Jaffer is an entrepreneur and the founder and CEO of Zain Ventures, an investment firm with over $100 million in assets under management. Zain Ventures invests in a range of startup businesses, real estate, stocks, hedge funds and private equity.
