There is no point in selling off assets in a panic, when the fall has already occurred, the indices will reverse, and it will be just as unexpected for you. Don’t try to guess the bottom and outsmart the market. We strongly advise against trading in such a situation on your own with leverage. Failure in this case is almost guaranteed. In order to reduce the pressure on the investment portfolio, one can gradually average positions on shares or buy additional short bonds of the first tier companies.
When will the markets bottom out?
The worst consequence of the spread of the coronavirus for the global economy is uncertainty. Everyone understands that the recession will most likely be stronger than in 2009, business income will drop sharply, and unemployment will increase. But no one, not even professional economists, can say how bad it will be in three months, six months, a year.
The virus that causes the disease COVID-19 has inevitably “infected” the stock markets. Exchanges around the world have been in a fever for over a month. Major American indices are now showing a record fall, as it was on March 16 (minus 12-13%), then a record growth amid the discussion of anti-crisis measures of the US government, as happened on March 24 (plus 8-11%).
With regard to global markets, one thing is certain: recovery and recovery are inevitable. It never happened that there was nothing. The worse the current news about the state of the economy, the more likely it is that the pivot point is close.
Equity markets have lost more than 30% at their peak and reached 2017 levels. The phase of the “bear market”, in which we are today, lasts on average about 14 months. The latest crisis lasted from October 2007 to March 2009, when the S&P 500 lost about 57%. It is likely that the recovery of quotes to the values of January 2020 will take a considerable time.
The positive news for investors is that the crisis in the stock markets is not synchronized with the economic crisis. Indices are the leading indicator of the state of affairs in the economy, however, the peak of growth here usually occurs just before the onset of a recession, and a reversal may occur well in advance, before the economy begins to recover.
It is almost impossible to determine the moment of maximum fall, and, consequently, the best time to enter. Some analysts believe that the bottom of the stock markets is closer than one would expect, and that stock prices are somewhere near their most attractive values.
Despite all the fears and concerns, Google Trends analytics show that the query “stocks to buy” is more popular today than ever. This does not mean that people will rush to buy shares tomorrow or the day after tomorrow, it can be assumed that they are making a shopping list to try to enter the best day of the sale.
With the current volatility of the markets, any manipulation of investment instruments carries an increased risk. For yourself, you must calculate all scenarios, including the most negative ones. It is difficult to abstract from the general panic, but it is necessary to understand that the worse it is, the more opportunities to earn in the medium and long term. After any crisis, the market recovers. The question is about timing and starting point.
Here are some basic recommendations on how to behave during a crisis, what exactly should not be done, what actions can be taken to reduce the pressure on your investment savings.
Mistake one: sell in panic when the market falls
According to statistics, the maximum inflow of funds to investment funds is observed at the peak of the market, immediately before its fall (for example, February 2020). If we recall 2008-2009, then the greatest outflow of funds occurs just before the turn.
In a more or less long term, you will not lose your investment if you invested in stocks or bonds before the start of the pandemic. It is unlikely that a large number of companies around the world face bankruptcy, unless they already stood on its doorstep before the onset of the crisis. Consequently, they will be able to continue their work, make a profit, pay dividends and pay off their debts. Sooner or later, the quotes will recover and go up.
Selling off your assets during a crisis and fixing a loss of 20-30% of investments is the main mistake of all investors. We do not have enough patience, psychologically at such moments we always expect the worst. You must understand that fundamentally, little has changed; in the face of the crisis, all securities are equal. If you had a balanced strategy, correctly determined the investment horizon, formed a portfolio in accordance with the risk profile, you just have to wait for a reversal.
Mistake two: fly in – it’s cheaper
Don’t try to outplay a volatile market, especially with leverage. The other extreme is trying to guess the bottom in falling markets. The investor can decide for himself: now I have seen everything – both the rising and the falling stock market – I am well-read enough to determine the right moment to enter. The person decides that since the market has already sunk so much, this opportunity should be used. Yesterday, the shares of company X were worth $ 100, and today they fell to 70.
He starts trading on his own, collects loans, opens a leverage with a broker and loads all the money into some, in his opinion, attractive positions. Leverage is the worst demon of an investor and bread and caviar for a broker. Trying to predict movement in a volatile market is the second fatal mistake.
Mistake three: buying dollars and transferring all funds into foreign exchange assets
The ruble was pegged to the oil price 30 years ago, 10 years ago and will be pegged in the foreseeable future. If you were not born yesterday, a dollar of 80–85 rubles should not be a surprise to you. There is no point in jumping into the last car of a departing train. Ask yourself why in calm and prosperous times, with free funds, you did not buy foreign exchange assets ?
It may be too late and unprofitable to run to the exchange office and buy currency with a spread for 84–85 rubles (at the current dollar exchange rate on the MICEX, 81 rubles) or urgently sell ruble assets and buy instruments in foreign currency. In fact, you will not gain anything, even if the dollar rate rises by another 10%. Think of the current story as another lesson.
Correcting mistakes: how the economic crisis is useful
It can be assumed that if you did not follow our simple advice, you have lost quite a lot in the moment. Nothing catastrophic happened. In the long run, you won’t lose your investment if you don’t panic. The crisis and the quarantine that coincided with it for many is the time to analyze their mistakes.
You’ve probably figured out the following basic things:
- You must always have a safety cushion, liquidity, which will allow you to maintain the current standard of living for six months, or better more, without receiving a regular salary.
- You can only invest free funds that you definitely will not need in any case for a long time. The most profitable investment horizon is from three years. During this period, any of the most difficult crises will fizzle out, you will definitely not go into negative territory.
- Diversification is not just a variety of securities in a portfolio, it is a certain degree of market neutrality. It implies the presence of a currency component, the presence of defensive assets, on which it is almost impossible to make money in good times, but which will reduce the pressure on investments during the crisis.
- Risk profiling is not an empty formality. It is during a crisis that you have the opportunity to feel how correctly you have defined your attitude to risks. There is no need to deceive yourself and the program by answering the question of what drawdown you are ready for in the market: 30%.
At the peak of investment inflows in late 2019 – early 2020, many entered without experience and bought everything without worrying too much about diversification and risk aversion. If the portfolio consisted only of stocks and bonds, there were no other defensive asset classes, the weighted average result was extremely negative. You can’t just come to the market, pour all the money into stocks when they have been in a growing trend for 10 years, and live in peace. This doesn’t happen.
99% of investors are wrong. The main thing is that these errors do not turn out to be fatal. It does not matter how your strategy works in emerging markets, it is important how it manifests itself in a crisis, even as unconventional as the current one.
How to reduce losses from investment in a crisis
It is optimal not to take any sudden and rash steps yet. Over time, stocks will win back their positions. If you have debt securities of companies with good credit ratings in your portfolio, you will get your percentage of yield to maturity anyway.
If you have free funds, you can try to reduce the negative pressure on the investment portfolio, where there is already a serious disadvantage, and start to average positions. That is, buy back these positions in small portions at current prices so that the average purchase price is lower. This should be done carefully, in minimal amounts, keeping in mind the horizon of three years.
One of the options for today is to slowly bribe foreign currency debt securities of stable companies, invest in short quality bonds that have fallen in price. At the moment, these securities sank by 3-7%, depending on the maturity. Taking into account the coupons that were paid before the fall (about 8% per annum for first-tier issuers), as well as the drawdowns, it is possible to fix a yield of 12% per annum in the future of one year.
Large Russian companies are unlikely to go bankrupt in the near future, which means they will pay their debts. We get an almost guaranteed profitability twice as high as the current rates on deposits, and wait out the crisis. Alternatively, you can buy a share in the Savings Fund and get profitability by reversing the trend.
Remember that any crisis passes. A smart investor learns from his own and others’ mistakes.