How to Recover Your Portfolio from the Corona Carnage

Published by Graham on

March 30, 2020

I saw an op-ed that you should invest your portfolio based on your risk tolerance and time horizon and have cash on hand and blah blah blah. Like, yeah, no duh… But what if we didn’t do all that and now we’re panicking?

First thing is first, a little tough love: you messed up. You dropped the ball. You should have been ready for this. But I forgive you and want to try and make it better now. Let’s work through a little damage control and see what we can salvage.

For the families whose wealth I help manage, the very first order of business is for me to get a clear picture of how much comes in and how much goes out. Right now open an excel sheet and list out everything you spend your money on then separate those expenses into things you cannot live without (committed) and things that you could cut if you reeeally had to (discretionary).

Now tally all those expenses up, including the discretionary, and multiply that by 12. You should have at least that much cash on hand.  Don’t have cash to get you through a few months of unemployment? Selling after a huge 32% drop is the absolute worst but the truth is, there is a chance you may need those funds and risking it further in hopes that you could make some of it back is a gambler’s mentality. It may be time to take your lickin’s and move on.

You just woke up from a coma. While you were asleep an uncle you never knew you had died and left you $250,000 – what do you do with it? Do you buy bonds? Do you stay in cash? Or is this the investing opportunity of a lifetime? If you decide that stocks are cheap relative to their future cash flows (they are) then you should slowly and systematically start buying! Just remember, we buy companies for their future expected earnings, not short-term swings in their stock price.  

Now is not the time to tell yourself that you will start getting back into the market once things start “calming down” or “looking better.”  If you had such great clairvoyance, then you would have sidestepped this whole market crash in the first place. And if you did successfully sidestep the drop, even just part of the drop, what exactly is your signal to get back in? Waiting for the virus to stop spreading? Waiting for the restaurants to reopen or for GDP to return to positive territory? You will have missed the rally by then, I’m afraid. If you are following Rule #1 then there is no reason to gamble on guessing the right reentry point.

There is a silent killer out there. He takes his victims so slowly that they don’t even know they are being killed. His name… INFLATION!  As you read the news about the government bailout program, expected to be about $2T at the time of this writing, remember why you invest your money in the first place. No, it’s not to get rich, no it’s not because you like torturing yourself during market implosions like this, it’s because you have no other choice.   [dramatic pause]   You can’t lose if you don’t play, right? Wrong!

Think of all the walkmans and furbees you could have purchased in 1990 with $100. That exact same $100 today can buy you exactly half as much as it could then. And yes, I know you aren’t going to stay in cash for 30 years but with inflation currently at 2.49% and a massive stimulus package that could potentially push inflation much higher, let’s say to 4%, can you really afford to give yourself a guaranteed 4% annualized loss in addition to possibly missing part (or all) of the future recovery in addition to the losses you have already sustained this year??? I didn’t think so.

I know it hurts when the market drops out from the bottom of you, but the risk of downside is just the price of admission. In truth, you should be in a portfolio that (1) is consistent with the amount of risk you can realistically handle and (2) rebalances on a regular basis to avoid being accidentally over exposed. If you’re not then this has been an expensive lesson for you but it could be much worse if you choose to lock-in your gains and change strategies midstream.