At the time of writing, most investors’ stock portfolios have recovered significantly from the precipitous drop in late February through March, 2020. Though the broad U.S and Canadian markets are still in a loss position compared to January 1st of this year – the TSX is down 8.4% and the S&P is down 1.8% at time of writing – the TSX has gained 40% from its low on March 23, and the S&P 500 has gained 45% from its low on the same day. Now that the worst is over – hopefully – what lessons can we learn from the COVID-19 crisis that can guide us through the next one?
First, take note of how you reacted to the market correction. Did you panic? Were you able to resist selling your stocks and hiding under the covers? How did the volatility make you feel? There is no guarantee that the next major market correction will be any easier to stomach. It could be larger in magnitude, a faster decline, or both. If you sold some or all of your stocks – regardless of whether that decision was well-timed – you should think carefully about whether the prospect of higher expected returns from stocks is worth the trade-off of their higher volatility. While stocks should be expected to provide higher returns than bonds and cash, those higher returns will not likely to come to fruition if you sell into a down market, and so it may be worthwhile to adjust your asset allocation to ensure the drops are less severe and you are less likely to sell in these volatile periods, though that means the gains will be smaller as well.
Second, consider your cash flow situation. Many people who rely on income from their portfolio to pay their expenses found themselves forced to sell securities at depressed prices, locking in losses even if they were able to resist the urge to liquidate more. A general rule of thumb in financial planning is to keep three to six months’ worth of expenses as an emergency fund in highly liquid, very safe securities – this means cash or cash equivalents. Looking back at your reaction to the crisis, is three months’ expenses enough money? The recovery from the next correction might not be as swift as this one. If doing so does not impede your portfolio’s ability to meet your goals, consider increasing your emergency fund to 12 months’ worth of expenses or even more. The mental comfort this provides can be invaluable, especially if it prevents you from making the mistake of liquidating a large portion of your portfolio at an inopportune time.
Third, give some thought to your expenses and your budgeting. Many people fortunate enough to continue working through the pandemic have found their expenses quite a bit lower than they would be normally. Childcare, transportation, travel and leisure activities are all areas where spending may be lower than anticipated. For instance, my family has gone from eating out 5-10 meals a week to only once or twice per week, we are paying nothing for public transit and very little for gas (and a reduced premium from our car insurance provider to boot), our travel expenses are much lower since we don’t want to fly anywhere, and we’re saving money on Blue Jays outings, dinner dates, weddings, and bachelor/ette festivities. If your situation is anything like ours, you might find a silver lining of extra cash in your pockets. Take the small victory and put the money to work by investing – an extra contribution can make a real impact in preparing your portfolio to meet your goals.
The COVID-19 crisis has been just that – a crisis in many respects. Portfolios have declined and mostly recovered, people’s lives have been thrown into disarray, and that’s without mentioning the illness itself and its impact on healthcare practitioners, other front-line workers, and everyone else. As the saying goes, “don’t let a good crisis go to waste” – take stock of your feelings now to prepare you for the next one.