The coronavirus outbreak is currently out of control. There’s just no other way to put it. New cases outside of China are growing exponentially. The US now leads the world in the number of active cases. The US is setting records for new case growth rates. If things don’t change in a hurry, New York city will offer a real life disaster movie. That’s the message from New York Governor, Andrew Cuomo. Canada does not have COVID-19 under control. Europe is frightening. Barring a miracle, things could get much worse. Should you de-risk your portfolio amid the COVID carnage?
Now certainly you might be feeling a little better about your portfolio today. We’ve had a three day rally. But first we had this …
And then we had this. The three day rally is also epic. The table is for US stocks, but Canadian returns are similar.
It’s kinda scary though. This rally is competing with rallies from the Great Depression.
As I reminded you recently the stock markets are ridiculous. Perhaps they’ve never been this silly before.
And rally they did.
Here’s a one year chart for the TSX 60, iShares XIU.
After this little relief rally, we’re only down about 15% over the last year. Over the last 5 years you’ve maybe eked out a 3% total return. Congrats. Over 10 years you’d have some solid but not spectacular returns. If you’ve also held US stocks you have some very nice gains over the last 5 years. With US stocks you likely have very generous gains over the last 10 years. Even with International stocks you would have some modest returns over the last 10 years.
So now what?
Are you investing within your risk tolerance level?
Yes, I’m a broken record. And that is my favourite question. Because nothing is more important than matching your portfolio to your time horizon and your tolerance for stock market mayhem. Sure let’s use the word carnage again. I’m not trying to scare you. But we should always be prepared for the big one. Let’s say, you should be ready to watch your stocks get cut in half. Things could even be worse than that. But corrections are usually much more manageable than a 50% haircut.
Of course, before COVID-19 hit you should have been investing within your risk tolerance level. You were ready, even though you did not know coronavirus by name.
As our friends at Mawer Investments often remind us …
You don’t fix a ship in a hurricane.Mawer
But what if you didn’t listen to Mawer. You didn’t listen to me.
Or perhaps you simply did not know your tolerance for risk? And what if this market correction handed you your risk tolerance @$$? I’m not sure if that makes sense, but I’m sure you’ll let me know.
Should you just throw up your hands and say ‘oh well’. Down with the ship.
Now first I’d certainly try to ‘talk you into’ seeing the benefits of staying the course and adding monies on a regular schedule. I can show you some long term charts. We can talk about the stock markets being on sale, and the long term value that is often found by investing during corrections. That’s all true. But you might not buy it. You know you’re off side.
You can de-risk your portfolio – risk down.
On the ship and sailing references, I remember doing a Lake Ontario crossing on my sailboat with my buddy Bill. It was a rough and windy day. Loved it. We were flying. New York here we come. But given the rough conditions and the pounding from the waves the port side stay that holds up the mast came undone, completely. It was flying in the wind. It was on the downward side (away from the wind direction), so the starboard stay was taking all the pressure.
Of course, I grabbed my tools and amid all of the pounding and shaking and crashing into the waves I went onto the deck and fixed it. I fixed a boat in a storm. I should have better prepared or affixed the stays. Hey, my Dad even warned me. I should have fixed it before the hurricane, but I didn’t. I learned a scary lesson. So did Bill. I never did get him on board again after we made it back to Frenchman’s Bay in Pickering.
You can fix your portfolio. You don’t have to bail completely on the S.S. Portfolio.
Shore up the portfolio.
You might simply add more ballast to the S.S. Portfolio. You need a bigger and heavier keel. And you might put up some smaller sails. Of course that means adding more bonds (keel) and reducing your stocks (sails). The S.S. Portfolio won’t go as fast but it will be a much smoother ride. You’ll be able to stay on board. At least you’ll get somewhere.
That will beat selling the S.S. Portfolio to buy that dinghy (savings account).
Your portfolio can still move at a decent clip with a Balanced or more conservative Balanced Income model. You are still going to keep some stocks as that main driver. You are going to sail away at your comfort level.
Certainly some advisors and planners or investment writers will disagree. They’d rather spend the hours necessary to make you see the value in staying the course with a more growth oriented portfolio. Maybe they simply refuse to change course.
And yet financial advisor Darryl Brown was open to a form of de-risking. He suggests that it’s more of a survival mode these days.
A few advisors have suggested that it’s time to hunker down.
Darryl went on to add, after I had suggested simply adding during the dips or on a regular schedule.
Many see the value in cash as a safety net. And the swift correction in tandem with bonds not doing their thing (at times) suggests retirees should entire retirement with a suitable cash cushion. Perhaps at least one year of spending needs. Many would suggest two to three years of spending needs in cash.
In August of 2019 Christine Benz of Morningstar had suggested the timing was good for retirees to de-risk the portfolio.
What about a severe recession or Depression?
And sure, anything can happen. A recession is a given. That could be relatively short, or it could last for years and years. As I stated in this post it is World War 3.
I’ve read way too much on COVID-19, so maybe I’m fearful and biased. But I think that we are only in the first or second inning in the US and Canada. Europe is a mess. The scenes are tragic.
Here’s the daily new cases chart. It’s simply accelerating.
It’s only a guess, but I don’t think the stock markets will react favourably when we get to the worst of it in the US , Canada and in France and Germany. And then wait until COVID-19 hits the developing nations that have little healthcare and the inability to practice social distancing.
And of course we have yet to begin to measure the economic damage caused by the necessary action of shutting down much of the economy. Wait until companies put forth their forward earnings estimates.
Many think it will get really bad. And the bad will hang around for quite a while. Mike Philbrick of Resolve Asset Management was on BNN recently and his top picks were Gold, US Treasuries and the US Dollar. There are many ways to de-risk your portfolio beyond the traditional bonds.
Mike is also a fan of some stock value hunting at the right time for those with the risk tolerance and time horizon. He helped with the thought process when I suggested investors who are greedy on the stock acquisition side might wait for Warren Buffett to signal that the coast is clear.
Mike will be more in the camp of the potential for a major structural change in economic regime. My guess is that things might get really nasty, but we’ll make it through. I still believe in the promise of owning many great companies for the longer term. I manage the risks by way of cash plus Canadian bonds and those US Treasuries. But I’m open to gold, again.
We all have to make our own call on how we manage the risks moving forward.
I’m not a stock analyst. Not a financial planner.
If you’re scared and confused you might contact an advice-only planner. You’ll receive conflict-free advice. And this might be especially important if you are in retirement or if you are approaching retirement.
My opinion is that if you are quite sure that you cannot withstand another 20-30% portfolio haircut, you might de-risk your portfolio. It is better to risk down, than to let risk end your investment career.
Please add your thoughts in the comment section. Do you need to de-risk your portfolio? Or are you embracing the correction as an investment opportunity? Perhaps you are simply adding monies on a regular schedule. Most will say that is the best course of action.
And as always please ensure that you understand all tax implications.
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