COVID-19, Staying Financially Calm in a Public Health Crisis

COVID-19, Staying Financially Calm in a Public Health Crisis

The novel coronavirus, COVID-19, is on everyone’s mind.  It’s hard to think or talk about anything else these last several days.  It’s certainly affecting every single aspect of my life.

A couple of weeks ago we had to cancel our family trip to Japan for spring break.  It was a trip I had been hoping to take for nearly 20 years.  When our kids were old enough, I had dreamed of taking them to see a part of their heritage.  Everything was planned including airline tickets, accommodations, JR rail passes, exhibit reservations, etc.  But unfortunately, COVID-19 has derailed these plans.

Since I work in healthcare, COVID-19 is certainly impacting my life at work.  I have been getting constant email updates from Mayo Clinic leadership and the Wisconsin Department of Health about evolving plans to deal with the anticipated local outbreak.  Meetings and conferences are being canceled to avoid large gatherings.  We are also canceling all business related travel.  

Likewise, it is affecting what I do at church.  The Church of Jesus Christ of Latter-Day Saints is temporarily suspending all gatherings of church members worldwide.  I am working on plans and instructions for our local church members here in Eau Claire, WI to make sure everyone is taken care of.  

The schools are sending emails about the evolving situation and tentative plans for schools closures should they become necessary.

And each day I watch the stock market rise and fall (mostly fall) as we have officially entered bear market territory.  

Like I said, it is really affecting every aspect of my life, as I’m sure it is for most of you as well.  So today I’d like to share a few thoughts about the novel coronavirus, COVID-19, from a personal finance perspective.

The Situation

As I am writing this post on March 12th, 2020, there have been approximately 130,000 cases of the new disease worldwide and nearly 5,000 deaths in more than 125 countries and territories around the world.  A travel ban was placed on most of Europe last night by the president.  Dozens of states in the US have declared a state of emergency.  Major sporting events, concerts, and gatherings are being canceled.  The NBA and NHL have suspended their seasons, MLB is halting spring training, and the NCAA March Madness tournament is canceled.  And March 12th, 2020 was the worst day the market has seen since Black Monday in 1987.  The list could go on and on.

Needless to say, with all of this uncertainty and fear, many people are left feeling very unsettled and unsure about the future.  When these feelings dominate people’s psyche, they are prone to make irrational decisions, especially financial ones.  

With that in mind, here are some important things to remember amidst the chaos related to personal finance:

You Only Lose Money When You Sell

As the stock market falls like a bowling ball dropped from the bleachers in a high school physics experiment, many people are watching their 401(k) balances drop precipitously as well.  It can be extremely scary to watch the money you’ve been saving and investing for years simply vanish.  I’m no different.  I’ve been watching our net worth go down by tens of thousands of dollars nearly every day.  

The gut instinct is to sell your shares in the stock market before things get worse and salvage what you can.  And that’s what some people are doing.  But let’s stop and think about this.  

First, don’t panic.  Panicking never helps any situation.  When I walk into a trauma bay, and a patient has a serious head or spine injury and is dying, it doesn’t help anyone if I freak out and crouch in the corner of the room in the fetal position.  Even if I have feelings of fear or uncertainty, I have to stay calm, assess the situation, and come up with the best plan possible.  The same goes for any stressful situation, including when the stock market is crashing.  Don’t panic.

Second, let’s remember what we are invested in when we buy stocks.  Stocks are a small share of ownership in a publicly traded company.  You literally own a small piece of that company (or small pieces of hundreds or thousands of companies if you own shares of an index fund).  Regardless of what the market values that stock at on any given day, you still own the same amount of that company or companies.  You only lose money if you sell that share of the company at a loss.  That is why you only lose money when you sell.

Let’s use your personal home as an analogy.  Let’s say you bought your home for $150,000 several years ago and now have it completely paid off.  Based on the current real estate market, it is valued at $200,000.  However, tomorrow the real estate market crashes and now your home is valued at $100,000.  It is still the same home as you lived in yesterday, but the market has changed.  In one scenario you panic and sell the home before things get worse, and you lock in a $50,000 loss.  In a better scenario, you stay calm, realize its still the same home and wait for the market to correct.  It takes a number of years, but the market ultimately does correct.  Many years later you sell the home for $300,000 making a significant profit because you stayed calm and didn’t panic.  

Finally, remember that the stock market always goes up.  If you look at the last 125 years of the stock market, you will see events like the Great Depression in 1929, Black Monday in 1987, the burst of the Dotcom Bubble in the early 2000s, and the Great Recession of 2007-9.  Even after all of these financial crises, the market always goes up over time.  It may take years, but the market always goes up.  Most of my readers have a long time horizon for their investment portfolio, meaning it will be a decade or two or three before they need to start accessing that money.  That is plenty of time for the market to correct.  I recommend remaining calm and staying the course.  Don’t make the mistake that so many people did back in 2008 and sell when the market is down.  And if you don’t have a long time horizon, hopefully you are adequately diversified and can draw on other assets while the market recovers, which brings us to our next point.  

Diversification is Extremely Important

Diversification is a key strategy when investing.  Basically it means don’t put all of your eggs in one basket.  

For those that ignored this strategy and are 100% invested in stocks, this bear market is likely exceptionally stressful.  This is especially true if there is a need to draw upon the assets now or in the near future.  If you are overly weighted in stocks and are having to sell them to meet your living expenses in a down market, you are hurting your chances that your nest egg will last you through the rest of your retirement.  That is why in retirement most financial advisors don’t recommend a majority of your portfolio be invested in volatile assets like the stock market.  

Conversely, for those that are well diversified with portions of their investment portfolio allocated to bonds, real estate, small businesses, cash, or other alternative assets in addition to stocks, this bear market is likely much less scary.  Well diversified investors that need to access their money can draw on those other asset classes to meet their needs, rather than selling stocks for a loss.  Admittedly, I have been very happy to have part of my portfolio in bonds, cash, and real estate savings during the last several days.  

If you haven’t been well diversified up to this point, it’s not too late to start.  However, don’t sell your stocks and buy other assets right now (see point above).  That would be selling low and buying high.  Rather, as you continue to invest in the future, I strongly recommend you create a financial plan with an appropriate asset allocation based on your future financial goals and time horizon.  I’ll write more on asset allocation in the near future because I believe it is one of the most important components of your financial plan.

You Need to Have an Emergency Fund

If this global pandemic hasn’t impressed upon you the need for an emergency fund, then I don’t know what will.  It has certainly reinforced for me how important it is to have some cash set aside for the unexpected.  

We really don’t know what the next days, weeks, or even months will bring.  Certain industries like tourism and the airlines will certainly be hit hard.  But I don’t think we can fully understand the far reaching effects on other areas of the economy as we consider the breakdown of global supply chains and decrease in overall consumption as people hunker down.  

Those that thought they had very secure jobs may work for companies that go out of business as a result of the pandemic.  Others may have their salaries or wages cut.  What about those that earn an hourly wage and can’t go to work if we end up being quarantined for a month like Italy?  What if the schools close for a month and you have to be home to take care of children and can’t go to work?  

In these situations, how will people pay their rent or mortgage?  Utilities?  Food?

These are all reasons why an emergency fund is so important.  If you have an adequate emergency fund, great job on being financially well prepared.  If you do not, don’t panic.  Start building it today.  And I mean like right now, today.  Before things get any worse, and they certainly could, start saving all the money you can right away.  Cut whatever expenses you can, and save whatever you can so you have as much cushion as possible for whatever the future may bring.  

What I’m Doing Moving Forward

Many of you are probably wondering what I’m doing.  How does this novel coronavirus and resulting financial crisis affect our financial plans moving forward?

Honestly, things are not too much different.  For the most part, we are going to stick to our financial plan, with perhaps a tweak or two.  We have all of our debts paid off, with the exception of our home mortgage.  We have money set aside in high yield savings accounts (which aren’t so high yield with the federal interest rate cuts) that can be used for emergencies if needed.  And although our investment portfolio is down with the market, we haven’t invested money that we need in the short term.  As a result, I haven’t lost any sleep about the bear market since we are long term buy and hold investors with a very long time horizon.

The first thing I may tweak is allocating a little more cash to our emergency fund.  As I mentioned above, the fallout from the coronavirus pandemic has impressed upon me the importance of having liquid cash available for the things that you just can’t predict.   I haven’t determined how much that is yet, but it could be up to 5% of our total portfolio value.

The next thing I will likely do is buy more shares of the Vanguard total stock market ETF (VTI) in our Roth IRA accounts.  I actually just completed our backdoor Roth IRA conversions for 2020, which should finish processing by the end of the week or Monday.  Given the drop in the prices of stocks , we will need to purchase more stocks (in the form of shares of VTI) to meet our predetermined asset allocation in our financial plan.  Buy more stocks right now?  Am I crazy?  Let’s talk about that a little.

Having a preset asset allocation (and sticking to it) based on your investing goals, risk tolerance, and time horizon is key to protecting yourself from yourself in turbulent financial times like these.  When you rebalance your portfolio according to your asset allocation, it keeps you from buying high and selling low, which is the poor behavior most investors have when they panic.  Let’s review how this works.  

Let’s say for example you have a 70/30 allocation for paper assets, which means you invest 70% in stocks and 30% in bonds.  To make the math easy, lets also assume you have $100,000 invested, which translates to $70,000 in stocks and $30,000 in bonds.  Now let’s say there is a 10% drop in the stock market, reducing your stock value to $63,000.  Bonds are usually inversely correlated, so let’s say they go up by 3.3% increasing the value of your bonds to $31,000.  If you panic with this 10% drop in stocks, you might decide to sell your stocks and buy the safer bonds.  After all, the bonds are going up in value, right?  This is exactly what selling low and buying high is.  Which means this is exactly how most investors lose money in the market.

If you rebalance your portfolio to your predetermined asset allocation of 70% stocks and 30% bonds, you would do the exact opposite.  You would buy low and sell high.  Let’s break down how this would work.  After the market drop, your portfolio is worth $63,000 in stocks plus $31,000 in bonds, for a total of $94,000.  70% of $94,000 is $65,800.  So you need to buy $2,580 more in stocks to achieve this percentage.  With the drop in the market, you are buying stocks for a 10% cheaper price, which is like getting them on sale (buying low).  In order to do this you would sell $2,580 of your bonds (selling high) and purchase stocks with this money.  By regularly rebalancing your portfolio in this manner you not only maintain a risk and return profile consistent with your investing goals, but also prevent poor investing behavior.

Back to my plan.  Another way to rebalance your portfolio when you are in the accumulation phase of investing is to purchase more of the shares that have gone down in value, rather than sell other assets in your portfolio that have gone up in value.  By doing this you are still buying low.  Another benefit of this approach is that you avoid any taxes when you avoid selling other assets.  While this would not matter in a retirement account like a 401(k) or Roth IRA, you would owe money on the capital gains in regular taxable brokerage account.  Something to keep in mind.

Conclusion

We are in a turbulent time.  I’m not sure when the world will stabilize from the effects of COVID-19.  It will likely take many weeks and months.  In the meantime, please stay safe and healthy.  Be wise with your money.  Don’t panic and remember that this too shall pass.  Here are some take home points to consider:

• Don’t panic.  You only lose money when you sell.  If you are a long term buy and hold and investor, calm yourself and ride out the storm.

• Diversification is an extremely important investing principle.  Make sure you don’t put all of your eggs in one basket.

• Make sure you have an adequate emergency fund for your needs and your situation.  If you don’t, start working on one today.

• Having a fixed asset allocation as part of your financial plan and rebalancing your portfolio can prevent you from poor investing decisions.

Thanks for reading.  I hope you are doing well in your progress towards reaching FI.  If you have any questions or comments that might help other readers, please list them below.  In the meantime, keeping working towards Freedom Through FI!

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