How to invest during a crisis

How do you invest during a crisis? The spread of coronavirus from Wuhan has got the world in a panic, including the stock markets. They dipped on Monday. Was this the start of the oft-predicted crash? Jim Rogers says ‘horrible times lay ahead’. But then Jim Rogers has been predicting crashes every year since the last one (a ‘biblical’(!) crash in 2016 and ‘the worst crash in our lifetime’ in 2017).

On Tuesday, the markets shrugged off the virus and prices went up again. Apple’s earnings from the previous quarter smashed expectations. People trying to time the market cursed themselves for missing Monday’s dip. People investing every month quietly got on with their lives and worried about more important things.

Here are a number of ways to react to a crisis and my blunt opinion on each one.

1)     Let your advisor handle it

Advisors and active fund managers will be busy re-positioning your portfolio to be more defensive in preparation for the crisis. They will sell stocks while they go down and move into bonds, pushing them up. Their crystal ball will tell them which industries are about to get hit hard. Somehow they know whether coronavirus will kill 1% of the global population or just a few elderly people in Asia.

Unfortunately, very few advisors and managers have shown they can navigate a downturn more successfully than a mix of passive stock and bond index trackers. Check out the SPIVA scorecard for some hard evidence. They will successfully liberate money from you in the form of high fees though.

2)     Let your advisor help you stay calm

If you have a good advisor, they may help calm you down as the market plunges. ‘Stay the course!’ they will chant and maybe make you a soothing cup of tea. The last thing you want to be doing is selling stocks in a downturn, then you will crystallise your losses. Ideally, you will do nothing other than keep investing regularly, riding out the downturn and keeping your mix of stocks and bonds balanced.

If you need an advisor to do that, maybe this is where they earn their money. Stopping you panicking and becoming your own worst enemy. But it’s a lot cheaper to work on your mindset first, so that when a crash comes you are zen enough to let it pass. Rely on the support of a group like SimplyFI or your Expat Saving & Investing workshop buddies – they’ll help you get through this and it won’t cost you a dime.

3)     Move out of stocks and into bonds

During a downturn, you suddenly realise stocks are risky. Maybe you were foolish enough to peek at the daily P&L of your portfolio and saw a few thousands of dollars lost. Bonds start to show they value. They sat there doing nothing for years, making you wonder why you didn’t put your cash in a high-interest savings account or property instead. Then Boom! the downturn hits and they are up 15%.

There is a good reason and a bad reason to change your allocation of stocks and bonds. It’s ok if you realise your stomach for volatility wasn’t what you thought it was and you need to calm your portfolio down. Similarly, if you are getting older, it might be time to be more conservative and edge close to the 60/40 stock/bond retirement portfolio.

Predicting a downturn or being in a downturn is a terrible reason to change allocation though. You will inevitably time it wrong if you are predicting a crash, and stocks will keep climbing after you sell out of them. During a crash, you will be selling stocks cheaply and buying bonds after they’ve increased in price. Is there further for the crash to run? Who knows. Stick to an allocation you feel comfortable with and keep buying.

The folly of a sprint finish

It’s worth mentioning here the people who come to investing late in the day and want to take more risk to boost their portfolio growth before retirement. ‘We lost lots of money with X advisor and so we have asked Y advisor to invest with maximum risk for rapid growth’. This really will lead to horrible times ahead, as the extra risk puts their money in danger of evaporating just before or just after retirement, with few years of earning power left to fix everything. (If you know someone like this, send them this to read!)

Instead, if you are worried about not having many years of portfolio growth left, try to invest as much money as you can (with the right safety nets in place). Boost your income(s) and slash expenses. But then invest the money sensibly, in or close to the 60/40 retirement allocation. If a downturn hits, you’ll be protected by the bonds in your sensible portfolio.

4)     Move out of stocks and into gold/bitcoin

Gold is seen as a safe haven and does go up during a crisis. It is especially good when the view is that currencies are declining in value vs real assets. Gold popped up in value on Monday while people fretted about coronavirus. Does this make gold a good investment though? Its value is more volatile than the US stock index and it can stay depressed in value for long periods of time. It also doesn’t generate any income, unlike bonds.

If you’re an Islamic investor, gold can be a reasonable substitute for the downside protection offered by bonds. A recent study suggested 10% gold in your portfolio after retirement can help diversification and stability (as gold prices are not strongly correlated with either stocks or bonds). But otherwise I would say you can live without it. A globally-diversified index fund will have access to gold miners and similar companies anyway.

As for bitcoin, it has recently been jumping in value when fear hits the stock markets. Any port in a storm it seems. Maybe it is like gold on steroids: super-volatile and zooming up when stocks look risky only to go back to its usual unpredictability when the crisis passes.

5)     Keep doing what you‘ve been doing

That’s better! If you have set up a sensible portfolio of a global stock index fund and a global bond fund, then there is really nothing you need to do. Your portfolio will handle the downturn. Just keep investing every month or quarter. Statistically, you are very likely to out-perform everyone else running from one side of the boat to the other as it rocks about in the storm. Stay centred. Stay calm.

Don’t keep money to one side just for this moment, as you will never find the right time to invest it. If you want to respond in any way to a downturn or a small dip, work hard and reduce your expenses, so you have a bit more money to deploy in the markets.

Downturns are stressful but they needn’t be. Unlike a leak in your property, usually the best thing you can do is ignore them and carry on as before.