An Important Moment In Investing

This post is a follow up from my post 2 weeks ago about trying to time the market in the days of the coronavirus pandemic. At that time, the S&P 500 was down 10% from its peak while the KLCI had dropped to where it was 9 years ago in 2011.

In just 14 days, the situation has deteriorated further. The S&P 500 is now 30% down from its peak, while the KLCI briefly touched 1,208, which was where it was back in 2009. Recession is just a matter of time away as the pandemic spreads to the large Western economies and forces businesses to temporarily shut down.

This will be a pivotal moment for those who build their wealth through investing in any asset class. For all the preparations made or lessons learnt, the next few months will be the time to put them into action. This is especially so for those who have not or have just started their investment journey.

But first…

Double Check Your Asset Allocation Layers

My Asset Allocation Layers – the higher you go, the more risks you take on

It goes without saying that if you don’t have enough cash savings and emergency savings to last you through at least 8 months of expenses (2 months in cash savings and another 6 months in emergency savings), you should stop here and focus on that first by following this link.

Now is a moment of immense stress on all economies and almost all businesses will be hit. If you are employed, your first priority will be to make yourself as valuable as possible to the company and yet be prepared financially in case you are laid off. If you are a business owner, your first priority will be to do everything you can so that your business survives the next 6 to 12 months, even when you are faced with the possibility of having very little business.

Raise Cash

Cash is the lifeline here so now is the time to conserve cash as frugally as you can. If you have prepared for this moment by hoarding cash for investment then good for you. If not, then now is the time to raise cash.

Address your big rocks:

  • if you are a renter, try to negotiate for a lower rent
  • if you have a mortgage or personal loan, try to refinance the loan to reduce the monthly payments
  • if you have insurance payments, try to cut down on policies that no longer serve your needs

Address your ‘variable expenses’:

  • Dramatically reduce eating out (you shouldn’t anyway as everyone should minimize their exposure to others outdoors). Cooking is cheaper, especially when you have a family.
  • No holidays. You cannot have one anyway since most countries have restricted tourist arrivals and you are not supposed to mingle in large crowds.

I’m sure you can identify more opportunities yourself.

Prepare for the Worst But Be Thoughtful

If you have streams of passive income (rental income, stock dividends, shares in businesses), now is the time to prepare for the worst.

Assume that your tenant will stop paying rent and the utilities since he or she could be struggling with income. Now is not the time to act tough with your tenant – you cannot find a new tenant easily either in a down market. Negotiate for flexible payment, reduce the rental temporarily or even offset the rental against the deposit – do your best to help your tenant get through this tough time.

Assume that your stock dividends will be reduced as companies also conserve cash as their profits will be hit hard. Don’t sell your stocks in anger – if these are good companies, they will return to profit when this is all over. If you have a proper asset allocation, and barring unforeseen circumstances, you don’t need the cash by selling the stocks prematurely either.

Assume that your business will require you to inject more cash to keep it afloat the next few months. If you are able to, take advantage of the low interest loans and grants offered by the government. It’s easier for your business to get these loans than your employees to get sufficient financial assistance to replace their income if you lay them off.

Be Patient in Putting Your Cash To Work

A period of a market crash followed by recession will continuously drag the market down for months and even up to a year. Given that the recent crash only started about a month ago, I would say that there is still plenty of time before we really see the market bottoming out. Consider that even when the pandemic is under control, it will take several months for businesses to re-establish the supply chains as some of them will not survive the recession.

Take your time to build up your cash reserves and deploy them to work slowly over time. There is no need to get excited and use all your cash to buy the depressed ETFs and stocks at one go. They can go lower and stay low for months. You will have plenty of time to observe the trend of the market and slowly buy into the market and stock.

The fact that you are raising cash and investing more in this period of time means that on average, you are buying more in the down market than you were prior to the crash in stock markets. This will set you up nicely for the future recovery in the stock markets.

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