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Now more than ever, we are living in doubtful times due to things that are beyond our scope of control. Our portfolios are being stress-tested on the allocations we made when times were great. It has always been said that the bulls take the stairs, and the bears take the elevator, and this is certainly the truth this week with the largest point drop since the 2008 financial crisis. Unless you bought the VIX, inverse index funds, are selling put options, have picked some very lucky names or are shorting many of these big droppers, you have likely lost money to some extent in the past several weeks. In this blog, I am going to address opportunities for safety and ways to remain resilient in these turbulent times.
Investors fear the worst. One of the reasons the market has been dropping so drastically over the past couple of weeks is because the virus outbreak is difficult to quantify. Will it affect 100,000 citizens or 50 million citizens? Fear often drives the market, and investors commonly react emotionally. It’s hard to tell how many people it will impact in the U.S and the financial repercussions industry over the industry. Travel stocks will be hit very hard such as airlines, hotel chains, casinos, cruise ships, and restaurants. Since we don’t know the long-term implications of the pandemic, it would be very risky, but potentially profitable to pick up stocks in these industries. Note, that purchasing in these industries long term would likely be a great play due to healthy valuations and p/e ratios, but don’t expect the volatility in these areas to reduce anytime soon. Companies that may fare better are ones such as consumer staples, IT, Healthcare companies, sin industries, and discount retailers. Think of products that people need to buy while everything is crumbling down to the ground. On the other hand, do people need that vacation to the Caribbean or brand new car?
Flee to safety. While yields in government bonds are near all-time lows, interest rates have dropped so far, bonds and high yield savings are the safer places to be at this point. Additionally, commodities such as gold, and silver will likely stand the test of time as investors flee falling equities. Cash-rich businesses, that have little debt are where you want to be right now. Always look for a company with a current ratio above 1, which ensures they can pay current liabilities. Look for long term debt ratios below 40%, and optimally 20%. In these situations, the company (borrower) isn’t over leveraged and can service all debts adequately when the creditor comes knocking. In my opinion, the best place to be when the market faces strong headwinds is in stocks that pay a healthy dividend. Examples of these are oil stocks and certain telecom stocks. The reason to invest in dividend-paying stocks is you are guaranteeing cash-flows every year by doing very little. Even if the stock drops a little, you are guaranteed that dividend yield. I try to avoid stocks that don’t pay me a dividend, and specifically, I aim for dividend yields above 5% and payout ratios below 70%.
Look at this extreme volatility as an opportunity. Remain cash-heavy and be sure to dollar cost average into areas where you see fit. Re-balance your portfolio weekly and don’t be afraid to add to your positions or cut your losses where you see an opportunity or know you made a bad decision. Give every single dollar a name and be sure not to panic as the market sells off. Look at 3-12% losses as discounts, rather than losses. The market is swinging heavily right now due to fear and speculation. With so many large events being canceled, travel restrictions and production shortages the economic activity is slowing significantly, and it is impacting almost every sector. To what extent? How much of this is fear-based? From the point in my second paragraph above, I mentioned investors fear the worst. To come out of this on top don’t try day trading, shorting the market or buying into the fear. While some may disagree, I see something else in the works. I see a red herring (corona-virus), being exasperated by all media outlets for an agenda. I will let you draw your conclusions here since we all have an opinion. Nevertheless, while I never saw the 11-year bull market coming to an end as it is now, and while I am unsure if it will turn into a recession. It is important to remain level headed and remains cautiously optimistic. To do so, save cash, pay off non-income generating debt, live below your means, diversify, dollar cost average, buy undervalued stocks and don’t react emotionally.