What do you need to embrace the stock market correction and recession created by COVID-19? First off, you need guts. We are in a period of extreme fear. You need to be able to press that buy button amid all of the scary reports and images. And it’s likely to get worse. You also need the time horizon. It’s possible that stock markets will deliver no returns for several years, perhaps a decade. And of course, you need the monies to invest. A few things have to be aligned for you to be able to embrace the stock market correction.
Now keep in mind that if you are currently in a lower risk or Balanced Portfolio you might simply keep on keepin’ on. You might add monies on a regular schedule. We should keep an eye on that retirement risk zone to ensure we prepare well before retirement. With a balanced portfolio you are managing the stock market risks and potentially reducing the portfolio recovery period. A Balanced Portfolio will typically recover much quicker than an all-equity portfolio.
How you manage the risks is a personal decision. One can go the traditional bond route. For more ideas you can have a read of the new balanced portfolio or how to prepare your portfolio for the coronavirus outbreak.
Dollar cost averaging during The Great Depression.
I’m not suggesting that we are going to enter a Depression. No one knows the answer to that. But sure, it’s a possibility. I believe in humans and the human spirit. I think things will get nasty but we will get through this.
But for argument sake let’s say that we do enter a severe and long recession or a depression. Let’s look back to the 1920’s and 1930’s. The following charts are from Plan B Economics and this article on Seeking Alpha.
That’s more than scary and nasty. I’ve invested in a chart that looks like that. It was the Nasdaq 100 during the dotcom bust of the early 2000’s. Not fun. You can have a read of the lost decade for US stocks.
But here’s the good news. What if an investor had the courage to invest on a regular schedule through the Great Depression?
That looks uh, ‘pretty good’ to use a technical investment term. Plan B had used a start date the somewhat replicates where we are as of today, taking into account the draw down we have already experienced.
Of course that chart looks better than the lump sum chart that displays the risk of investment amounts already held or invested at the time.
The financial crisis.
And if you dollar cost averaged through the financial crisis? For US stocks, we start with $1000 and invest $1000 every month.
Of course, while markets did fall by some 50%, there was a quick recovery. The S&P 500 returned just over 2% for the 5 year period. But with dollar cost averaging the investor was able to take advantage of lower prices to create a personal money weighted return of over 10% annual. Lower prices are good of course. And of course we need that eventual recovery.
You might embrace the stock market correction. This might be a wonderful investment opportunity. Again, you need the time horizon and the tolerance for risk. This might be a gift for those early enough in the accumulation stage.
Keep in mind this is not investment advice. Know thyself. Know the risks.
If in doubt, if you need advice, you might contact an advice-only planner.
We’ll start with Robin’s Reads, from The Evidence Based Investor. So many great topics and a must see video at the bottom of that post. We could all use a smile or two these days.
On MoneySense and from Bryan Borzykowski investing in the time of COVID-19 checks in with many experts.
On findependencehub another update on Aman Raina’s experience with a Canadian Robo Advisor. Aman goes over his recent and 5-year returns.
On myownadvisor Mark Seed asks if there is power in delaying retirement. I’ve heard from a few planners who would suggest you don’t quit your day job. You might also raise some cash for a worse case scenario.
Related post on Boomer and Echo: Is there a new normal for the 4% rule?
The Balance looks at US bear markets and their recoveries.
And this is a time to be careful with short term trades and more exotic risk management ETFs. The markets have stopped functioning properly at times. That goes the same with many discount brokerages. I’ve been very pleased with TD Waterhouse. It has worked very well.
Here’s 6 things Ben Carlson has been pondering during the crisis.
On the Canadian bank investment question, Horizons suggests this might be a wonderful opportunity.
In the Financial Post Victor Ferreira offers why some market watchers are not too quick to call a bottom.
And south of the border (armed with US troops?) Barry Ritholtz offers his Sunday Reads.
This week I asked if you should de-risk your portfolio during the COVID carnage.
Thanks for reading. Be safe. You know the drill. I think most are being sensible. Be prepared. The apex in New York, the US epicentre, will likely occur in 3 weeks according to Governor Cuomo.
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