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The Road to Recovery from COVID-19 & How to Stress Test Your Investments

The Road to Recovery from COVID-19 & How to Stress Test Your Investments

April 09, 2020
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The emotional, physical, and financial impact of the novel coronavirus (COVID-19) so far has been one for the books. Its effects on human lives across the world have been robust, and uncharted territory for most. Self-quarantine measures have spawned a new way of life - temporarily - and have caused shocks to the worldwide economy that not even the world's most renown economists can easily forecast.

We have all watched the financial markets whipsaw to various extremes over the past few weeks as investors grapple with their own psyche and "doomsday" media headlines. The government showed up with an enormous stimulus package (or 2) to help ease the current impact on us consumers, and to help ensure a speedy recovery. Given the fact that the situation has changed dramatically over the last couple weeks, we wanted to shed more light on what we are seeing from an economic and financial perspective.

What will the COVID-19 recovery look like?

We don't think anyone knows exactly what the recovery will look like in the U.S., but we can assess the current recovery in China - who is months ahead of us and seems to be progressing well. While still better, we expect a changed world when quarantines are lifted.

At first, we will likely still be "phasing" back in to our normal lives. In China for example: restaurants are already open, a lot of people are still wearing masks, tables are spaced further apart, and dining party sizes are limited. This is just one possibility of what we may experience at first here in the states.

We believe recovery is a matter of when, not if. Looking at the current environment in the U.S., we think the economy could be back on track by as early as 2021. One key takeaway from the last few weeks is that the economy is not the stock market. Rather, the stock market is a "leading indicator" of the economy. 

Leading indicators such as: unemployment rates, manufacturing, building permits, etc. adjust prior to large economic changes. Therefore, they can be used to help predict future trends in the economy. Because leading indicators have the potential to forecast where an economy is headed, fiscal policymakers and governments make use of them to implement or alter programs in order to ward off a recession or other negative economic events1 - which is exactly what we have already seen, and at record levels.

COVID-19 impact on investors

This bear market (down 20% from recent market highs), has been entirely different from those of the past. Not only that, but it has been the quickest fall into bear market territory ever. However there are unique reasons for this. COVID-19 at its core is a worldwide health concern not a financial concern. However its effects have now cascaded beyond health concerns, and bled into the overall economy.

Aside from the initial shock and fear of the virus itself, we feel a vast majority of the stock and bond market sell-off came from expectations that the economy will suffer because of the national shutdown. Note that we implemented the economic shut down for our own well-being. The economy will no doubt suffer when we put a temporary stop to it, this is obvious. The current bear market was, in essence, created due to an effort to keep us all safe.

In an extremely short period of time, investors have seen some of the time-tested market principals play out right in front of them. The markets have recently experienced some of the best days in history, as well as the worst. Not only that, but some of those days came back-to-back in the same week! This is a great example of what we at GMV & Associates had discussed in previous articles and letters to clients - missing the best few days in the market can be detrimental to long-term investment returns.

If you had sold your investments to cash to "sit on the sidelines" after some of those historic market declines, it is extremely unlikely you were reinvested within a matter of days in order to catch some of the biggest market rebound days in history. Most investors that got out did so because they wanted to wait for the virus to be contained and the economy to open back up again (this is unless of course you used a tax/loss harvesting strategy that we implement frequently).

Remember, the issue with timing the market is that stocks are a leading indicator; they reflect market and economic expectations before they really happen. Therefore, if you are waiting for sunshine and roses to appear before jumping back in, you are going to be too late. You will potentially be left behind for years to come. 

Risk tolerance

After stomaching the recent extreme market gyrations, many investors are now questioning their tolerance for risk. Remember when your 401(k) company or financial advisor asked you those risk questions and you chose from 4-5 pre-set answers? (i.e. "how would you feel if your portfolio declined 10% in 3 months?"). For most investors those risk tolerance guides should still be fairly accurate since they also take into account time horizon and liquidity needs. However even the most conservative investors got hit pretty hard recently.

Many investors access their investments via 401(k) accounts and the like; many also utilize target date investments (i.e. Target Date 2020) which were created to gradually become more conservative the closer you get to your retirement date. A large portion of 401(k) participants use and trust these "one-and-done investments" to manage risk for them. How did they hold up during the recent volatility? Not as you might expect...

*See this article from Bloomberg on some of the top money manager's target date performance during the recent market volatility:

"Target Date Funds Held a Nasty Surprise for Retirees"

  

We understand this recent phenomenon and would be more than happy to help you understand your true tolerance for investment risk. We can break it down in a way you likely haven't seen before and can help you make impactful changes to your investment portfolio.

Do you know much risk your 401(k) or trust account is really taking? Are you getting enough reward for the risk you are taking?

  

Test Your Retirement Account's Risk Here

   

The bottom line

COVID-19 has caused undeniable fear across the globe. Our current goal should be to stay healthy and resilient in these unprecedented times. Aside from the importance of our physical health, our financial health ultimately affects our mental well-being, and therefore we should sit back and assess our overall financial situation. Where are the stressors, if any? Where can we improve? Are there opportunities that have presented themselves?

Although this has been and will continue to be a bumpy ride, there are a lot of reasons for the glass to be half-full. Please revisit your financial plan. If you don't have one, we suggest you find a qualified CERTIFIED FINANCIAL PLANNER™ professional to help you.

Fun fact: Since 1949, the average bull market (upward trending) has lasted 72 months, while the average bear market (downward trending) has lasted 14 months.

Key takeaway for investors: There are a whole host of opportunities - a silver lining - that have come about because of the virus' impact on markets. Assess whether or not you should be taking action - See our blog on what you can do.

Key takeaway for retirees and soon-to-be retirees: Interest rates are likely to stay very low for a very long time. Keeping your savings in cash or low interest-bearing bonds is not likely to get you the income you need to meet your retirement goals. Talk with us or your planner about how to account for this while maintaining an appropriate amount of risk. For insight on some of the retirement cash management and distribution strategies we use at GMV & Associates, visit our blog - Plan-It.

   

Cameron Valadez is a CERTIFIED FINANCIAL PLANNER™ in Riverside, California


 

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

This material represents an assessment of the market environment as of April 9, 2020, and is not intended to be a forecast of future events or a guarantee of future results. It is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. All investing involves risk and the potential to lose principal, and there can be no guarantee that any investing strategy will be successful. Past performance is no indication of future results.

1 https://www.moneycrashers.com/leading-lagging-economic-indicators/