• Marc

How your portfolio will survive the Covid-19 equity market crash

Updated: Apr 3, 2020

If you have recently browsed through the daily health news and the current equity market news, your emotional and psychological resolve has certainly been and will most likely continue to be battered by an onslaught of depressing news. Do you feel depressed after you take your daily sip from the firehose of depressing news of the global pandemic unfolding in front of our eyes with exponentially rising daily case and death counts? And after you have taken that daily sip from the depressing fire hose, if you then turn to look at your portfolio performance, does your level of anxiety and depression get amplified to the maximum level?

Your first reaction now should be to take a deep breath. While all medical professionals around the world are currently fighting in the trenches to contain the spread and the lethality of the current Covid-19 pandemic you might want to put your current portfolio performance into perspective. You will probably have read headlines recently like “Capitalism is dead. All G-7 countries are forced to give handouts to everybody” or headlines like “The lines in front of the soup kitchens will be longer in 2020 compared to the great depression of the 1930s”. But ask yourself if you really are convinced that all equity markets will now go to zero (or near zero), that capitalism will end, that we will uninvent electricity and all the technologies of the past one hundred years and that we will go back to the Stone Age, barter trade and jettison the capitalistic system with its free markets out the window on a global basis.

Now, imagine you are an equity investor in December 1941. We are still in the beginning of WW2 at that time, and the war in continental Europe is really worrying. And now comes the absolute nightmare event: the attack on Pearl Harbour in December 1941 inevitably means that this war will now go completely global. Would you not have been worried about death counts and the future performance of your investment portfolio back then in December 1941?

Let’s have a look what the WW2 death toll looked like and how resilient capital markets had been in spite of these horrific death counts (and, yes, I can hear you mumble “But, Marc, hindsight is 20/20!”):

First, the overview of the horrific, senseless death count of 75 million casualties during WW2 and the breakdown by nationality:

Wouldn't you agree that - had a December 1941 investor known the final death tally of WW2 ahead of time - this investor would most likely have come to the conclusion to “sell everything in my portfolio and run for the exits”, just as you might feel now after looking at your portfolio in March 2020?

Now let us look at the picture of the market performance since 1926, including the time of WW2:

Can you now see how resilient free equity and bond markets actually are in the long term, including the time of the worst war this world has ever seen in the early to mid-1940s?

Some readers might interject here while looking at the picture above and say: 1. “But Marc, this current Covid-19 outbreak cannot be compared to WW2, whole economies are currently shut with zero economic activity. This is different from ongoing economic activity during WW2” Answer: Yes, you are right, there are countries (and likely more countries will have to follow) that are in complete lock-down at this very moment in March 2020, severely reducing economic activity. Nevertheless, there are two items you should consider: a) a lot of the activity of economic value creation nowadays takes place electronically with our ability to utilize modern communication technology. That was not the case in WW2.

b) Just as during WW2, where factories were temporarily retooled to manufacture weapons and ammunition, so will factories nowadays be retooled to temporarily manufacture medical personal protective equipment (PPE) like face masks, etc, and ventilators in order to fight the current virus outbreak, coupled with economic hyperactivity to find antiviral treatments for currently infected people and a future vaccine. Economic activity will not come to a 100% stop, it will just be re-channeled into other areas during the current viral epidemic and will resume again to pre-crisis levels after the global spread has been contained (and, at the latest, once a Covid-19 vaccine might be rolled out globally within the next 18 to 24 months). And, if you ask me personally, hyper-production of PPE and accelerated economic activity in pharmaceutical research nowadays is certainly preferable to hyper-production of weapons, tanks, and ammunition in the 1940s.

2. “But Marc, the above picture also captures the Great Depression of 1929 to 1935. Isn’t that the scenario which we are now facing, possibly even with much larger magnitude today as a direct outcome of the current great de-leveraging?” Answer: Humankind has created institutions like the FED and other global institutions which will step in to stop downward spirals as had happened during the Great Depression in the 1930s. In the interest of keeping this blog article short, I invite readers to drop me an email if they need further information in this regard.

3. “But Marc, my keen eye noticed that you used a logarithmic x-Axis in the picture above. Could you show me for how long the markets were down in bear markets in the past?” Answer: Here you go, and please remember, the picture below presumes a 100% equity portfolio:

We humans are primed to project linearly into the future. And since we had exited our most recent bear market exactly 132 months (= 11 years) ago, most people just blindly projected this benign upward trajectory to continue into the future for years to come. And Mr. Market has his way of teaching us lessons to not forget that market downturns – especially severe downturns – do happen with regularity and that the onus is on us to invest in a suitable risk profile commensurate with our own individual situation.

The above considerations are the reasons why I spend a lot of time finding out a client’s maximum risk profile and intended investment horizon. And, as already mentioned, do keep in mind that the picture above assumes a 100% equity portfolio; the duration in portfolio loss territory are significantly shorter for lower risk-profiles.

So what should you do now?

1. Stop drinking from the firehose of daily depressing health and equity market news! Leave it to the health professionals to tackle the health crisis, they are doing the hard-lifting for all of us.

2. Keep yourself and your family safe! Strict social distancing is necessary to buy our healthcare workers time and to delay the inevitable future onslaught of your home country’s healthcare system. The current Covid-19 global pandemic is an acid test of every single country's three main pillars, namely: a) The quality, preparedness, and responsiveness of a country's healthcare system; b) The standard of governance of each country; c) The social capital of each country. While I agree that a lot of time has been squandered in items a) and b) above and while there are only very few countries in the world with good report cards in all three of these areas, the onus is now on you and your family members to do your part in item c) above!

3. Stop looking at your portfolio on a daily basis! You should have a plan to rebalance as the market moves further down or as the market recovers (and you should have this plan already ahead of time and stick to it), but you really do not need to be glued to the screen with bloodshot eyes to observe how your portfolio currently behaves on a tick-by-tick basis.

4. Your investment focus should zoom out from this or the next quarter — where your vision is fogged by daily market gyrations — to years ahead, where, paradoxically, we have a lot more clarity. It is easy to look at the current Covid-19 market decline as a curse, but if you look a few years out, you can expect to see that the current sell-off provided the opportunity to add to existing positions on the cheap and to add more high-quality and undervalued stocks to your portfolio. Of course, you need to be prepared for the possibility that every decision you make today will look wrong tomorrow or in a week or a month from now, as we have no idea if and how long this market decline will continue. You should be completely fine with that, as long as these decisions are proven right several years out (see the market recoveries depicted above of all the crises of the past 95 years) and as long as you follow an evidence-based investment approach, ideally rooted in the insights of Nobel Laureates in Economics. Existing readers of my blog and existing clients will know what that entails, new readers of my blog can go through my blog history to read up on the topic of evidence-based, low-cost index fund investing and on the topic of behavioral finance.

Famed value investor Shelby Davis summarized beautifully how we should behave now: “You make most of your money in a bear market; you just don’t realize it at the time.”