Investing in the age of Covid-19

Face it, the last few months have been tough.  Hundreds of thousands have died worldwide, the global economy came to a virtual standstill, there are some 40 million unemployed people in the US, and markets have been quite volatile, to say the least. 

So, how are you supposed to invest in an environment like this? Do you go all-in thinking that the world will get back to normal quickly? Do you stay in cash because you think the recovery will not be perfect and there will be a second wave of infections? Or do you simply do absolutely nothing because you are too paralyzed to act? 

Before we answer that question, let’s put the current crisis into perspective. 

There are many people that look at our current situation and liken it to the Great Depression.  We would contend, however, that the Great Depression may not be the appropriate comparison.  While the downturn may end up being “depression-ish”, the recovery will likely be much different for the following reasons (source: Wall Street Journal, May 10, 2020): 

• According to Former Federal Reserve Chairman, Ben Bernanke, a major cause of the Great Depression was a breakdown in the financial system.  Today, Bernanke states that “banks are stronger and much better capitalized”. 

• During the Great Depression, Douglas Irwin, a professor at Dartmouth College, claims there was a “slow and steady decline.  It was a slow strangulation of the economy.”  Contrast that to our current situation, which can be likened to a car slamming on its brakes due to government policy. 

• Gita Gopinath, chief economist at the International Monetary Fund, suggests that while this and the Great Depression are both global phenomena, the scale today is much smaller.  During the Great Depression, the world economy shrunk by 10% versus a current expectation of 3% with growth beginning again next year. 

• During the Great Depression, central banks and governments exacerbated the problem by tightening money supply and cutting spending.  The exact opposite is happening today. 

So, rather than likening the current situation to the Great Depression, a more apt comparison might be to a global disaster.  In a disaster, there is a rapid cessation of activity until the disaster has been addressed.  Once the disaster has been addressed, a quick recovery tends to ensue.  Think about Katrina, 9/11, etc. 

Let’s be clear, though. Just because this may be more akin to a natural disaster does not mean that we are off to the races tomorrow.  There are a lot of people who are currently unemployed.  There are a lot of people who are terrified to go out in public. There are a lot of businesses that will never open their doors again. And the list goes on. 

So, getting back to our initial question, how do you invest during a time like this? 

There are certainly investors who are sitting on a ton of cash.  While we do not know with 100% certainty, as of the May shareholder meeting of Berkshire Hathaway, it appeared that Warren Buffett may be one of those. 

There are certainly investors who are all-in. 

At Lifestyle Freedom, you may recall that our portfolios are split into two components, both of which are designed based on your specific goals along with your ability and need to take on investment risk.  The first component is a long-term investment portfolio that does not try to time market events.  This component has remained fully invested during this crisis.  Of late, that’s been a great thing as the markets have certainly been convinced that the problems are all behind us (whether or not that’s true remains to be seen). As a reminder, for more conservative investors, this portion of the portfolio can be constructed with built-in hedges to reduce risk right off the bat.  Those hedges worked very well during the March downturn. 

The second component of our portfolio is more opportunistic in nature.  It is based on what we call a “weight of the evidence” approach and is very disciplined in its decisions.  As the indicators underlying the approach suggest a defensive posture is appropriate, we get more conservative.  Conversely, as the indicators suggest a more offensive posture is appropriate, we get more aggressive.  For most of the crisis, we have been a bit more conservative, and we look forward to the day that the indicators suggest we get a bit more aggressive. 

To boil it down, how have we been investing during this crisis?  Just like we were investing before the crisis and just like we plan on continuing to invest going forward. 

We are here to chat if you have any questions about your portfolio or your ability to meet your longer terms goals.