What to do when markets crash???
We have seen historic moves in the markets this month. Volatility is back in spades. So how can we best weather the storm? Is there a way we can benefit? What should we learn for next time?
These are the times when fortunes are made... and lost.
Although we cannot change the past, where you started this downturn has a lot to do with what you are able to do now that we are in the middle of it.
If your portfolio was 100% equity before the downturn: You are in a tough position. Nobody knows when this is going to turn. It could start back up tomorrow or go down another 30%. What drives that is unknown (when will they have a vaccine, better treatments, better ways to stop the spread). Selling now is not prudent you are best off enduring the pain.
What you can do is put new money into the markets. Look at what is down the most and try to increase the amounts you are putting into those investments. New money is your key to success and will be far more beneficial than the money you put in two weeks ago. Look for ways to maximize new contributions and hold onto what you currently have.
If you had a well diversified portfolio before the downturn: You are in a very good position, although it is still painful in the short term. You want to be re-balancing regularly during the downturn. This will move assets out of strong performing bonds and into the lower priced equities. You may even consider increasing your equity exposure if the cumulative losses get very large.
As of today large cap US equities are down 35% and small cap 40% from their highs. Moving from a 60/40 (equities/bonds) portfolio to a 65/35 or 70/30 will add a lot of juice to your returns when the markets start doing well again. At the very least, rebalance back to your target allocations as you notice they have moved well out of range.
If you were in mostly cash before the downturn: You may be very risk averse, or you may not have wanted to invest new cash in the high valuations you were seeing in the market and so it built up. You should be feeling very good about your lack of losses right now. Don't wait too long to put your money to work or that good feeling will turn to regret that you did not act and missed out when markets turn. Catching the bottom is nearly impossible.
So should you put it all in now? I would say no, move in slowly. Maybe invest 10%-20% of your holdings at certain points of market drop. i.e. put 20% in now and for every 5% drop in the market, add 10% more. That still only has you 50% invested when the markets are down 50%.
The hardest thing about being 100% in cash is making the leap to get back in. It is almost never done well. You have to get over the mindset of avoiding losses or you won't get in while they are dropping. And you have to get over the mindset of wanting the lowest price or you won't get back in when they start going back up.
I have watched multiple people fight themselves over not wanting losses so they stay out and then when things start doing well they feel that they missed the bottom and they wait for markets to come back to them. They end up being perpetual cash investors and lose out on a lot of opportunities.
What can we learn from this experience:
These are the times when fortunes are made... and lost.
Although we cannot change the past, where you started this downturn has a lot to do with what you are able to do now that we are in the middle of it.
If your portfolio was 100% equity before the downturn: You are in a tough position. Nobody knows when this is going to turn. It could start back up tomorrow or go down another 30%. What drives that is unknown (when will they have a vaccine, better treatments, better ways to stop the spread). Selling now is not prudent you are best off enduring the pain.
What you can do is put new money into the markets. Look at what is down the most and try to increase the amounts you are putting into those investments. New money is your key to success and will be far more beneficial than the money you put in two weeks ago. Look for ways to maximize new contributions and hold onto what you currently have.
If you had a well diversified portfolio before the downturn: You are in a very good position, although it is still painful in the short term. You want to be re-balancing regularly during the downturn. This will move assets out of strong performing bonds and into the lower priced equities. You may even consider increasing your equity exposure if the cumulative losses get very large.
As of today large cap US equities are down 35% and small cap 40% from their highs. Moving from a 60/40 (equities/bonds) portfolio to a 65/35 or 70/30 will add a lot of juice to your returns when the markets start doing well again. At the very least, rebalance back to your target allocations as you notice they have moved well out of range.
If you were in mostly cash before the downturn: You may be very risk averse, or you may not have wanted to invest new cash in the high valuations you were seeing in the market and so it built up. You should be feeling very good about your lack of losses right now. Don't wait too long to put your money to work or that good feeling will turn to regret that you did not act and missed out when markets turn. Catching the bottom is nearly impossible.
So should you put it all in now? I would say no, move in slowly. Maybe invest 10%-20% of your holdings at certain points of market drop. i.e. put 20% in now and for every 5% drop in the market, add 10% more. That still only has you 50% invested when the markets are down 50%.
The hardest thing about being 100% in cash is making the leap to get back in. It is almost never done well. You have to get over the mindset of avoiding losses or you won't get in while they are dropping. And you have to get over the mindset of wanting the lowest price or you won't get back in when they start going back up.
I have watched multiple people fight themselves over not wanting losses so they stay out and then when things start doing well they feel that they missed the bottom and they wait for markets to come back to them. They end up being perpetual cash investors and lose out on a lot of opportunities.
What can we learn from this experience:
- Diversification, especially when markets are expensive, gives you options when they fall apart. It is worth a slightly lower return while they are soaring.
- You never know what is going to cause the next market downturn, so it is almost impossible to avoid. No one predicted that Zoom (ticker ZM) was going to be a great hedge for this downturn.
- Practice long term thinking, don't worry about what is going to happen in the next 3 months or even year. Focus on where things will likely be in 10 years. You will have to stay away from CNN to do this. You have not lost anything until you sell and lock in the current return.
- Markets are always vulnerable. When things are going well it is hard to envision what could go wrong (and vice versa) but they are always vulnerable, and maybe especially vulnerable when no one sees the risks.
- The opposite of the previous point is that markets are resilient. They are most likely not going to zero and they have weathered worse things than Coronavirus. When no one can envision what could go right for the markets is probably the time you should get 100% invested.
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