After having spent over 10 years working for the most prestigious names in the financial industry and having witnessed first hand two large financial stress periods (the Global Financial Crisis and the European Debt Crisis) here are my ten suggestions you may potentially consider while investing
1. Buy gradually on the way down
If you have directly or indirectly prepared for a period of financial stress and have available cash you may consider starting investing now. A good strategy is to build rules and stick to them – either based on certain index levels e.g. S&P 500 at 2500 invest 20% of savings, 2300 another 20% etc. or based on timing (slicing every few weeks since we have no clarity which way the market may go and when it will bottom out)
2. Do not chase an upward trend in a bear market
One of the common mistakes we see is people chasing upward trends because of FOMO – Fear of Missing Out (when stock market recovers for a few days giving hope of long term gains). It takes more courage to buy according to predefined rules which often means buying when everything is gloomy and stocks lose massively. But in the long term it pays off. Do not be tempted by rebounds that may prove short-lived
3. Do not try to time the market
Even the best investors struggle with market timing. In fact most hedge funds (even the most prestigious ones) made substantial losses in the few past weeks.
The market can turn rapidly both ways and while you may avoid some bad days avoiding just a few good ones can be extremely detrimental to your long term performance as illustrated by a study done by Fidelity.
It is extremely risky to use leverage today since additional debt implies you must be correct on timing
4. Invest, do not speculate
You may not get spectacular 300-400% returns but your money will be relatively safe if you base your decisions on sound financial statements and diversify. ETFs are a great way to invest in indices without taking idiosyncratic risk (e.g. Luckin Coffee (see right) recently dropped 80% in one day on uncovered fraud – as Warren Buffett says “Only when the tide goes out do you discover who’s been swimming naked”).
Ask yourself the question – am I more qualified than a professional investor to predict which industry player may outperform the rest of the market? Do I know how the landscape post crisis will look like? Even if you suspect knowing first order effects are you sure of the second and higher order effect (to Nicholas Taleb’s point)?
5. Avoid binary outcomes
Each crisis has its own most vulnerable industries where outcomes can be binary – in 2008 some Banks went out of business and as an investor you may have lost everything. The Coronavirus crisis has other prime candidates for such outcomes, airlines can be nationalised and hotel/tourism industry players can go bankrupt should the distress last longer. You want to avoid these investments until there is more clarity on consumer confidence
6. Look for financially resilient firms
If you do invest in single names, do not believe blindly in potentially meaningless dividend yields based on past data unless it has been confirmed by the management after incorporating all the outlook related to Covid-19. Instead look at balance sheets with low debt and build-in resilience (cash). These firms may outperform and even acquire weaker competitors in the current environment
7. Cash is King
Ray Dalio now infamously said a couple of months ago that ‘Cash is Trash’. While he is one of the best thinkers in Finance the remark was badly timed. Even in the most conservative scenarios keep some reserves. This is primarily a health crisis and while an economic crisis unfolds having a safety net is paramount. Additional unforeseen tail risks always exists
8. Diversify in other assets including currencies, commodities and high quality debt products
It is difficult to predict which countries may relatively outperform. Keep your portfolio diversified geographically (e.g. Asia, Europe, US) and product-wise potentially including commodities like Gold that may outperform in low real rates / high inflation environments. Consider very high quality debt products (Treasuries or Investment Grade Debt)
9. Stay informed but remain cautious
And adjust your strategies accordingly. But be very careful with financial experts and consensus – when you see opinions converging usually something else will happen
10. Duration of the coronavirus pandemic is key
The risks are still skewed to the downside. While there is an attractive discount to peak market values and positive catalysts may materialise (most pharmas are working on Coronavirus vaccines and mitigating drugs) the time it takes and the change of behaviour will alter the markets significantly. The impact on people’s health even when cured and society at large is at this stage highly uncertain. Stay safe and healthy! [Read this post about potential way out]
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.