Updated
UNPRECEDENTED.
We’ve all heard that word a thousand times over the last few weeks. As concerns over COVID-19 have forced literally billions of us global citizens to sit at home, we’re all acutely aware that these are indeed unprecedented times – impacting our daily lives and our physical, emotional, social and most certainly our financial wellness.
It’s also hard to ignore the impact the COVID-19 is having on our personal investment portfolio. We’ve witnessed trillions of dollars being wiped from the major stock markets. The rebound and relief rally we’re now seeing is on shaky ground and hasn’t been enough to calm nerves.
Many are anxious about their money and ability to reach their life goals.
“ Is there more downside for the markets?”
“ Should I take profit now?”
“ Should I pile into stocks now?”
“ What does this mean for my retirement?”
“ How do I know my advisor is doing the right thing?”
I can’t predict the future, nor can you or anyone else. Your best defense is to recognize the underlying fundamentals that affect businesses so you understand the effect it has on our ability to make money.
This will give you more confidence in a plan that’s proactive and not reactive, and protect for the downside. You’ll be more inclined to block out the noise, stay focused and not let emotions sweep you into making regretful decisions.
Understand the fundamentals: How COVID-19 is affecting our economy
Having covered the economy and markets for 15+ years as a financial correspondent and analyst, there are signs and indicators I’m paying a great deal of attention to, and that is how much damage is being done to corporations, to which sectors and the economic hit it’s taking on the wider employee base.
The global response by authorities to help contain the coronavirus epidemic and prevent a pandemic has been rightfully, to restrict social contact in those highly affected areas. Most major economies around the world – in particular the U.S., U.K, China, Japan and India are essentially under lockdown.
That means we are facing a supply shock as much as a demand shock.
Hundreds of millions of workers are not able to go to factories to produce goods. Outside of those considered essential services, stores and most restaurants – big and small – are shuttered and unable to provide services, goods or meals. This is what we call a supply shock.
At the same time, people are not going out. So consumer-spending which is the backbone of most economies (accounts for 60% of Canada’s GDP and 70% of the U.S.’s GDP) is deeply suffering. Hence, a demand shock.
Block out the noise. Stay focused. And don’t let emotions sweep you into making regretful decisions.
The problem is exasperated by the fact that companies have fixed costs like rent, loan payments, wages, and utilities they still have to pay regardless of how business is doing. We’re already seeing millions of layoffs. If these disruptions are long-lasting, we will see millions more. Companies could go under – especially small businesses that don’t have flexibility.
This in turn means a greater hit to spending. Even if closures are temporary, most business owners have already taken a large hit to their pocketbook, and that’s likely to have an effect on future spending in the near term.
The impact on global stock markets
The impact of COVID-19 on businesses is what sparked the initial market sell-off. Investors saw the immediate and potential impact was global and widespread and dumped shares in droves.
We can’t completely ignore the market reaction because it’s reflecting the possibility of lower corporate revenues and profits. However, I’m a firm believer that the sell-off is reflecting only a portion of what’s yet to come. We’ve yet to see the quarterly results and projections from a vast majority of corporations. Outside of the defensive plays, it’s hard to believe we won’t see either pessimistic forecasts or companies simply dropping forecasts because they don’t have visibility into the near future.
There’s some support in that we’ve seen many global central banks pump liquidity into the markets by buying assets from banks and corporations (quantitative easing or QE). This is to keep credit from freezing – ensuring loans continue to be available. But in the end, sales matter. Productivity is essential. Both have plunged, Hence my belief we’re heading for a recession.
What this means for your money and portfolio
First, I’d encourage you to not panic and react to the daily noise produced by the markets. If you’re tempted to freak out because of a drop in your investment value, remember that these are “paper losses or declines”. Until you physically sell your investment, you haven’t realized a loss.
Should you sell your stocks now?
To answer this, I always go back to the golden rule of investing – diversification and being in the right asset allocation for your life goals and risk tolerance.
If you are in the right mix of equities based on your life stage, you may not want to touch your stocks. That is, if you decided that you should be in 50% equities, and you’re still around that level, stay calm. Stocks are a long-term game. While we don’t know how the next year or even two will unfold, the long-term trend of stocks will be up and we will see stocks recover – with some companies and sectors doing better than others. That’s why being diversified across different industries and types of stocks are important.
If you were really offside with your allocation, then you need to decide whether to sell some of your equities (if you were overweighted equities) or buy more (if you were underweighted equities). Why? Because if you were too overweighted in stocks in the first place, you were taking on more risk than you set out to originally.
Look at the average cost of your specific investment and compare it to the current trading price. Are you up 20%? 30%? 10%? Flat? This will put your investment performance in perspective.
Should you pile into stocks now?
Again, go back to your ideal asset allocation. If you were underweighted stocks, don’t need a portion of that money and can afford to be in more equities, and you can stomach risk considering buying into the asset class.
It’s difficult to time the markets, even for the most experienced investor. So a good method to going in, is to dollar-cost-average in – that’s is buy a bit at a time instead of at one go. You may buy it at a higher price now, and you may get more for your buck if the market goes down. The cost averages out.
What this could mean for your retirement
Once again, that question depends on how your portfolio is diversified across different assets and whether it’s in line with your time to retirement.
If you’re approaching retirement soon or in retirement, you should be in some safer and liquid type assets like bonds or cash type products. This takes into account your need to use that portion to fund your lifestyle, and that you don’t have to sell stocks at a loss when you need that portion of money to live on.
Does the stock market drop affect your lifestyle now? If not, you don’t need to worry much. Now, if you rely on dividends from stocks, and the company is on pretty solid ground, you should continue to receive a regular income so the value is less relevant – unless the stock price drops so much that it threatens the company’s ability to continue to pay that dividend. That might be a possibility for some companies.
Remember that if you’re in your 40’s or younger, even if the market falls dramatically, there is time for it to rebound by the time you need to dip into your funds to live off.
How to know if your advisor is doing the right thing
Set up a time to speak to him and her.
You want to know that your portfolio is in line with your risk tolerance and life goals first and foremost. Remember that your advisor doesn’t have a crystal ball and can’t predict markets, but they should be able to explain to you how well you’re diversified to weather the storm and whether you’re able to reach your intended goals. They should be “stress-testing” your portfolio and creating a Plan B and C.