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Wall Street has suffered its worst session since 1987’s infamous “Black Monday”, and the World Health Organization has officially classified the novel coronavirus—Covid-19—as a global pandemic. It looks as though major US employers are set to announce widespread layoffs to stay afloat. Fortunately, instead of frantically checking your 401(k), there are concrete steps you can take to protect your wealth amid the chaos and the noise.
Hang Onto Cash
Amid high degrees of market volatility, it’s a good idea to hold a larger share of your net worth in hard currency such as US Dollars. Although it’s unwise to rush into cash or bonds, it’s important that you hold a share of your net worth (e.g., 5-20% depending on age and risk tolerance) in both of these assets during an economic downturn.
Having an emergency fund in cash will help you stay afloat in the event that you cannot work and do not have paid sick leave. Above all else, holding an emergency fund in cash that can cover between 3 and 6 months’ worth of living expenses can provide relief in the event of a disaster.
If you don’t already have an open line of credit (LoC), it may be worth considering applying for one. Not only are interest rates currently low, which means you will be paying very little to access much-needed credit, but an LoC can also provide an important source of emergency capital if you lose your income source during the pandemic.
Don’t Time the Market
It is virtually impossible to detect the bottom of a market correction. Do not assume that any time is the correct time to reenter the market and buy the dip. Instead, stick to your dollar-cost averaging plan and make no attempt to time the market. If your portfolio is truly diversified, you shouldn’t notice your holdings going red or green in lockstep—rather, you should find various assets making gains and losses at different times.
Ultimately, short-term market events should never dictate how you calibrate your portfolio in the long-term. For investors who intend to remain in the market for 20, 30 years or more, only marginal adjustments to asset allocations should be made during pandemics and other crises. After all, you’re bound to encounter more swings in the market in the future.
Hedging Against Inflation
Expect strong inflationary effects on the US dollar in the months ahead as fiscal stimulus packages inject new funds into the financial system. If investors want their portfolio to outearn the inflation rate, they should be prepared to tolerate uncertainty and risk. A high-growth portfolio should include a larger share of stocks which, during past crises, have proven to be strong performers in the aftermath of crises—however, realizing these gains will take longer than safe-haven investments (often, several consecutive quarters or longer) and assume a much higher degree of risk.
Recovery In Sight? Don’t Count On It
The extent of Covid-19’s ripple effect on the global economy is not yet certain. What we do know is its effects will be felt across all industries. In today’s globalized economy, all roads eventually lead to China, where a virus containment crisis could spell catastrophe or, more likely, a lasting worldwide recession.
It will take time to repair the damage done by the coronavirus. The policy playbook of yesteryear won’t solve this problem. Fiscal stimulus and monetary policy are no match for a global pandemic. No amount of government spending will ease the fears of tourists and bring them overseas. Interest rate cuts won’t revive shuttered Chinese factories or maintain worker productivity in the US.
We should expect the economic effects of the coronavirus to last months, not weeks. Don’t expect any lasting stock market rebounds or meaningful growth in US equities in the months ahead. Instead, times of uncertainty call for safe-haven investments such as US Treasury bonds as well as gold and other precious metals. Other alternative assets, such as real estate, are also relatively safe stores of value when securities markets are in decline.
Gold and Alternatives: Safe-Haven Assets
Market uncertainty drives investors toward gold as a beacon of stability. The supply of gold is relatively constant compared to cash and paper-backed assets, which makes gold a hedge against inflation while its industrial usage in manufacturing and jewelry production creates a steady demand for the yellow metal. For this reason, gold has historically outperformed stock market indices during recessions, including the latest recession during the late-2000s financial crisis.
The price of gold has steadily trended upward for most of the last decade. As shown below, the price of gold has risen to above the US$1,630 mark from only $1,290 in May 2019. This, despite widespread volatility in the US equities market.
Wait Out The Bear Market With Confidence
There is little predictability during a pandemic. However, holding cash, gold, and alternative assets such as cryptocurrencies may help mitigate losses and ensure that you hold relatively stable stores of wealth amid a crashing equities market and rapidly inflating currencies.
As unnerving as stock market volatility may be, it’s important to remain calm when handling your investments and to not time the market. Instead, readjust your asset allocation so that you hold a greater share of your wealth in cash, gold, and alternative assets. For investors with a low risk tolerance, it may be in your interest to recalibrate your 401(k) or IRA with gold and invest in other safe-haven assets that have historically performed well during crises past.