As if worrying about the rapidly spreading coronavirus isn’t taxing enough, we’re also dealing with a full on-stock market crash. After hitting an all-time high of 3,386 on February 19, the S&P 500 closed at just under 2,305 on March 20. That’s a decline of nearly 32% in a space of just 30 days.
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Though the coronavirus is being blamed for the sudden collapse in the market, other factors have also been in play. For example, the entire energy sector is under stress now that the price of oil has fallen by more than 50% just since the beginning of this year. Meanwhile, projections that we have already entered a recession are widespread.
Fortunately, stock market crashes have happened before. That alone should give us a reassuring perspective on how this crash is likely to turn out. There’s much you can learn from previous market crashes that can help you personally and professionally, in addition to better managing your portfolio.
Avoid Panic and Focus on the Long-term
Yes, this advice has been making the rounds so frequently that it’s virtually become a cliché. But it’s so common precisely because it’s almost certainly the best foundational strategy for dealing with a market crash.
Within the past 33 years, we’ve had three major stock market crashes – 1987, the Dot.com Bust (2000 – 2003), and the Financial Meltdown (2007 – 2008). There have also been at least an equal number of mini crashes in between, with the most recent occurring in the last quarter of 2018.
But all of these crashes and mini crashes have one thing in common: we’ve not only survived them, but the market has gone on to reach new highs after each one.
As painful as the current crash is at the moment, it’s mission-critical to focus on the long-term. And history tells us there’s nothing but good news on that front. Whatever your investment strategy was before the crash, there’s no need to make fundamental changes. This market, just like every other before it, will also go on to reach new highs.
“I learned the hard way during October 19, 1987, that emotions play a big part when investing our hard-earned money,” recalls Mitchell Bloom, Financial Advisor at Bloom Financial, LLC in Westminster, Colorado. “The most important things that came out of that event was understanding how it’s important to keep your long-term perspective.”
Continues Bloom, “Yes, this is a cruddy time having to deal with the virus, and the current environment is scary. But we must look to the future and remind ourselves of just how well markets have recovered from previous events. Long-term, the markets will hit new highs again. The markets rose after the dot com bubble and the mortgage crisis, and they will rise again.”
Anticipate Income Disruptions
If a recession does hit, as now seems all but certain, income disruptions are more than a remote possibility. If you’re an employee, layoffs are a real threat as companies turn to cost-cutting to improve the bottom line. If you’re a business owner, you may already be experiencing a decline in revenues due to mandated shutdowns across the country.
Short-term, the best strategy is to have an adequate cash cushion. It won’t solve a long-term cash flow problem, but it will give you the breathing room you need to develop new income strategies.
Adds Bloom Financial’s Mitchell Bloom, “You may need more money under the umbrella of cash for rainy day funds. Instead of maybe three or four months of monthly expenses, you have six to seven months set aside.”
In addition to adequate cash reserves, now is an excellent time to create a side hustle, or even several. Not only will that help to generate additional revenue should the current business shut down continue for several months, but it’s also a strategy to expand your income after the economic disruption ends.
Since many businesses have been shut down, one of the best ways to generate additional revenue streams is to earn money online. There’s nothing magic about setting up an online business. You’ll run it just as you would any other type of business, except it will happen online. That will have a major advantage that it will enable you to expand your marketing reach beyond your immediate geographic area, and to do it without needing to leave your office, shop or home.
If you’ve never run an online business, or you need help setting up a side hustle, it may be worth investing a few hundred dollars to buy an online course. You’ll get the benefit of training from someone who’s already done it, which will shorten the ramp-up time. And in the economic landscape we appear to be entering, speed will be a major factor.
In addition, some industries may take longer to recover from the recession than others. Developing additional revenue streams will help you wait it out.
“In the 2008 Recession, I was working in securitized commercial real estate, and watched the company I worked for go from the second fastest growing company according to Inc. magazine, to out-of-business within two years,” recounts Tony Liddle, CFP and CEO at Wisconsin-based Prosper Wealth Management. “This taught me first-hand how important diversification was. The company’s sole source of revenue was based on real estate transactions, and when those stopped the company’s revenue stopped. Since learning that lesson I’ve always tried to keep numerous forms of revenue going for any of our businesses and I’m always looking for more diverse streams of income.”
Build Up Cash to Buy Stocks as the Market Decline Slows
There’s not much that can be done about losses you’ve sustained in your portfolio since the beginning of the crash. But the best way to reverse those losses – and eventually resume growing your portfolio – is to build cash reserves to buy stocks at depressed prices. I personally made some of my very best investments in 2009 when the last bear market in stocks market bottomed. You have an opportunity to do the same now.
There’s no way to know when this market will hit bottom. But we do know that it’s already fallen significantly, enough that buying opportunities are now presenting themselves.
You certainly shouldn’t go into the market and buy a bunch of new positions all at once. After all, the market may continue to decline for all the same reasons it’s fallen up to this point.
But you can begin by dollar-cost-averaging your way into new stock positions. Let’s say you have $10,000 in cash you’re waiting to invest. Rather than putting it all to the market at once, instead invest $1,000 per month over the next 10 months.
If the market continues to decline, you’ll be buying new stocks at progressively lower prices. But if it begins to rise, you’ll be expanding your holdings at what may be the best possible time. If the market just returns to its pre-crash levels within the next year, you’ll reap impressive gains with reduced risk and very little additional effort.
Don’t buy stocks on margin. Margin buying was becoming increasingly popular as the market rose to successively higher levels. But with the current turbulence, buying stocks on margin may be little more than a recipe to lose money faster.
If you’re going to invest do it with 100% cash. That won’t guarantee immediate gains, but it will avoid the accelerated and devastating losses that can come with buying on margin.
Rebalance Your Portfolio
One of the most compelling reasons to invest fresh cash in stocks during a declining market is to maintain your original portfolio allocations. With the recent selloff in stocks, it’s likely your equity allocation has fallen significantly since the middle of February.
“I started my career in the industry in 2006 just before the 2008-2009 Financial Crisis,” remembers Brian Behl, CFP and founder of Behl Wealth Management based in Waukesha, Wisconsin. “I saw a lot of panic selling but the investors who stayed the course ended up best in the long run. Those that sold near the bottom and went to cash were hurt the most. Instead, I highly encourage rebalancing to target allocations during times like this, when you’ll have a good opportunity to “buy low”. If you had a portfolio that was 60% stocks, it may be down to 45% now. Buying back up to the target level allows you to benefit when markets recover. And if people are saving and adding to portfolios, use this as an opportunity to make your annual IRA/Roth contributions and buy while the market is down.”
In a real way, using portfolio rebalancing to target allocations is an excellent way to take advantage of dollar-cost-averaging. You’ll be restoring your full equity allocation at a time when stocks can be bought at discounted prices. And when the market begins to recover – as it always does – you’ll be putting your portfolio in position to reap the biggest gains.
Avoid Peer-to-Peer Lending and Seek Greater Safety on Fixed Income Investments
Over the past decade, peer-to-peer lending has become an increasingly popular way to invest. Against the backdrop of historically low interest rates on more traditional savings vehicles, like certificates of deposit and savings accounts, peer-to-peer lending offers an opportunity to earn higher returns on fixed value investments.
I’ve been advocating for peer-to-peer investing for years, since I’ve earned much higher returns on my money than I could get in bank-based investments. We’re talking returns of 5% to 7%, compared to 1% to 2% on bank deposits and even U.S. Treasury securities.
But given the uncertainty in the financial markets and the increasing prospects for a recession, peer-to-peer investing may be best avoided at this time.
First, peer-to-peer lending and investment has only come on the scene since the last recession. There’s no model indicating how the investment class will perform in a recession from beginning to end.
Second, peer-to-peer investing is about funding unsecured consumer loans to individuals. Since consumer loan performance tends to decline in recessions, returns on peer-to-peer lending may not be as solid as they’ve been in the recent past. And if enough loans default, it’s possible you could even lose money on your principal investment.
A better choice may be to park your fixed income investments in high-yield certificates of deposit. CDs may be particularly important given that interest rates seem likely to fall in the coming months. You can lock in current rates, some of which are in the 2% range, for a year or longer.
Those interest rates won’t come close to matching the stock returns of the past decade. But they will be a way to earn a decent return on your cash, as you build it for future stock purchases.
There’s no way to know how long the current carnage in stocks will continue. Nor is there any way to know how deep the next recession will be, if in fact one is even certain to arrive. But you should do everything you can to maintain both your carer (or business) and income, as well as to position your investment portfolio for the next leg up.
As easy as it is to give into the panic of the moment, it’s likely the next class of self-made millionaires will be building their foundations in 2020. You can be one of them, but only if you’re prepared to take bold action now.