Covid-19: Making Wise Investment Decisions during the “Great Pause”

Remember February 2009? Stock markets had fallen more than 40% over 6 months. What did investors do? They sold more stocks that month than any other in history – at the market low!

It was followed by the longest bull market in history – 11 years and 2 days from March 10, 2009 till March 12, 2020. The S&P500 grew by 18.3%/year!

A “bull market” is defined as a rising market without a decline of 20% or more. Our longest bull market ended with the fastest 20% decline in history – just 3 weeks. We are now officially in a “bear market”, which is a declining market that is down more than 20% from the previous high point.

Bear markets typically happen 2 or 3 times per decade, with 20% and 30% declines being quite common, but 40+% declines pretty rare.

What now? What is smart to do with your investments now?

 

Long-term Thinking is Clear

The secret to smart investing is thinking long-term. Short-term investment decisions are incredibly hard. When you think long-term, smart investing is clear.

The key is having faith in the stock market long-term. History shows us that the stock market is very unpredictable short-term and medium-term, but reliable long-term. Stock markets rise long-term because the profits of the companies rise over time. “Optimism is the only realism.” ²

Based on history, 20 years from now, stock markets will almost definitely be 4 to 8 times higher than today.¹ What difference do the next few weeks or months make, when you are confident in the long-term growth?

In February 2009, I predicted it “will probably be the best buying opportunity of your life.” ³ This was not any great insight. To me, it was obvious, because the market had fallen more than 40% and I am confident in the long-term growth.

You have an opportunity today to be invested at 20+% off. Eventually, the virus will be over and stock markets will return to their normal long-term uptrend.

Of course, the markets might go lower and there could be even better buying opportunities to come. But that doesn’t change the fact that this is a good buying opportunity. To take advantage of it, you need to be fully invested before the inevitable recovery.

This is why people with a Financial Plan are wealthier. Your Financial Plan changes your thinking to long-term. “All successful investing is goal-oriented and planning driven. All unsuccessful investing is market-oriented and performance driven.” ²

The secret to successful investing is clear:

1. Be fully invested through entire bull markets. Get the full long-term growth of the stock market.
2. Bear markets are buying opportunities. Buy more at lower prices to outperform.

Think long-term and it’s clear this is a good buying opportunity. Not as good as February 2009, but still a good buying opportunity.

 

Time Horizon

Do you have a long-term time horizon? When do you plan to retire? In 10, 20 or 30 years? Today, in 50% of couples at least one partner will live 32 years after retiring.

Investments for your retirement or to leave to your kids are almost always long-term. You will invest more effectively if you think long-term.

You may have other investments for shorter term purposes and then you may want to be more cautious. But your retirement and legacy investments are almost always long-term.

 

Short-term Investing is Incredibly Hard

I have no idea what markets will do the next few weeks or months. They could fall quite a bit further. They could bounce back. There are solid reasons either could happen.

The Covid-19 virus may be controlled. It may go away in spring or warmer weather like many viruses. We might have a vaccine approved and widely available in a few weeks or months. We might have a short time of “social distancing” and then go back to normal.

On the other extreme, it could eventually spread to 70% of our population. With a death rate between 2%-3.5% among people diagnosed, there could be a million dead in Canada. Social distancing may do nothing other than prolong it. A million dead over 1-2 years instead of 1-2 months.

The stock market does not move based on the virus itself. Short-term it is usually based on the expectations of investors 9-12 months ahead. Recent movements are probably more based on panic then on expectations, since it’s not yet clear what will happen. Of course, the media greatly exaggerates panic. Short-term, some panic might be justified.

However, periods of panic lead to the biggest buying opportunities. News that it will eventually be okay is probably all that is needed for a recovery. In fact, we don’t even need good news for a recovery. Stock markets typically bounces back when new bad news stops or when news is “less bad” than yesterday.

We consider the short-term buying and selling of investment-focused investors as “dumb money” and the long-term wise moves of planning-focused investors as “smart money”.

Investment-focused advisors have an incredibly hard job of trying to guess what will happen short-term. I have no idea.

As financial planners, we are focused on your long-term life goals. What will happen long-term is obvious. When you think long-term, smart investing is clear.

 

“Great Pause”

The 1930s had the Great Depression. In 2008, we had the Great Recession. We are calling 2020 the “Great Pause”. The virus is disruptive, not destructive.

Eventually, the virus will be gone. Will there be any long-term effects?

If there will be little or no long-term effects on profits of companies, then the market should return to its normal long-term uptrend when the “Great Pause” is over.

 

Key Issues to Ponder

If you wonder what will happen with your investments, don’t waste your time trying to guess the short term. It’s unknowable. Focus on long-term effects on company profits. Will there be any?

Here are some possibilities to ponder:

• Will there be a lot of deaths? The worst-case of a million deaths sounds horrible. Fewer people mean a smaller economy. However, the vast majority will be people over 80, so it could take pressure off future health care and pension costs.
• Will there be long-term damage to our economy? Will a lot of people lose their homes from being out of work for a few weeks or months? Will a lot of small businesses go bankrupt after being effectively shut down for a few months?
• Will we end up with all kinds of new rules and regulations in many industries that slow the economy, like we did after the Great Recession in 2008?
• Will we have a Baby Boom at the end of 2020, like we did 9 months after the blackout of 2003?

Long-term, stock markets are determined by the profits of the companies in the stock market. Will current events have any long-term effects on company profits?

 

Smart Opportunities

After the “Great Pause”, will you be better off financially? You have 2 big opportunities:

1. Invest more during this buying opportunity. If markets fall more, it’s a bigger opportunity. This opportunity will last until the inevitable market rebound. It might end quickly or it may be available for many months.
2. Refinance your mortgage or other loans at super-low interest rates not seen since the 1950s. The Bank of Canada reduced interest rates by a full 1% the last week from 1.75% to .75%. Banks reduced their prime rates from 3.95% to 3.45%, with more reductions likely this week. Two or 3 more small rate cuts are expected in the coming months. You can come out of 2020 with an amazingly low mortgage rate.

 

Wise Investing

We have the best clients! We spent all of last week talking with client after client calling us to ask, “Is this a good time to invest?” That’s exactly the right mindset for wise investing!

Many investment-focused people have been selling their stocks. Focused on the short-term, they think somehow they can buy in “after the market stabilizes” and avoid losing more money. This only helps them if they buy in lower than where they sell. When the market “stabilizes”, it will be at least 20-50% higher and they will have locked in a permanent loss.

This is the “Big Mistake” – selling or switching to more conservative investments after a market decline. It’s the single biggest investing mistake. It’s like getting off an airplane because of turbulence.

The human gut is designed for “fight or flight”, not for investing.  Don’t make the “Big Mistake” of thinking short-term.

Great investors like Warren Buffett outperform nearly all investors by investing 100% in stocks for the long-term and never trying to time the markets. Buffett’s famous quote: “Be fearful when people are greedy and greedy when people are fearful.”

When you think long-term, smart investing is clear. This is clearly a good buying opportunity.

 

 

Ed

 

¹ The worst 25-year calendar period for the S&P500 in the last 90 years was a gain of 7.9%/year, which means markets are 4 times higher after 20 years. Average stock market returns have been 10-12%/year, which means markets are between 6 and 9 times higher after 20 years.

² Nick Murray.

³ https://edrempel.com/how-to-take-advantage-of-the-market-after-the-crash-of-2008/