Wednesday, March 25, 2020

Why is Everybody Talking About Investing?

Once again the world is being rattled to its core by a Black Swan event – this time a coronavirus pandemic. What is a Black Swan you ask? It is an event that has the following characteristics:

- it is unpredictable and lies outside the norm of regular expectations
- it causes a massive impact
- with hindsight, people insist the event was obvious, and we concoct explanations to make it seem explainable and predictable

While specific Black Swans are by their nature unpredictable, what is predictable is that they happen frequently. They are just different every time. And this time people are not just scared for their money; they are scared for their lives.

Recently I’ve been spending a lot of time talking to friends and family about investing. It’s no surprise as the recent market gyrations prod people into thinking there might be a buying opportunity. Or they rock you with fear as you watch your portfolio evaporate before your eyes. In either case, violently whipsawing stock markets grab peoples’ attention.

Is now a good time to invest? In general, if you are a long term investor then anytime is a good time to invest. Experienced investors know that it is impossible to time the market and it is foolish trying to predict what will happen in the markets tomorrow, next week, next month, or next year. Saying that, stock markets have historically risen over time and this is driven by our global economic system and mantra of constant and never-ending growth, plus an ever-expanding world population.

I was thinking this week of the last major market meltdown in 2008/9 and I remembered that I wrote a blog during that time to try and capture my feeling as the markets were being pummeled.  The TSX had dropped 45% from 14,700 to about 8,000 over a period of 9 months then hit bottom in February 2009. After watching it bounce up by 15% over a period of 10 days, and considering putting more money in the market, here’s what I wrote.

Blog post from March 19, 2009: Sucker’s Rally or the Bottom?

Like now, back then I didn't have a clue if markets had hit bottom or not. In retrospect, they had hit bottom, and after this point they did indeed shoot back up in a strong rally.

Seems eerily familiar to what is happening today. In February 2020, the TSX hit an all-time high of just shy of 18,000. In one month, it dropped 37% to 11172, and in the past two days has bounced back about 15%. So is the market low right now, or does it have further to fall? Or will it rocket up tomorrow? Nobody knows. And if anybody tells you that they do, then they are a liar.

Here’s the 20 year map of the TSX.

It almost looks predictable. All you had to do to make money was wait until the market dropped, then buy at the bottom and watch your investments shoot up. But we live in the present, and of course there is no way to know when these bottoms are occurring. If you look at the rightmost side of the chart, which represents the current time, you can see that the market has dropped down to a previous low point, which was about 4 years ago.

So, is now a good time to invest? That’s the wrong question. The right question is, does my investment plan require me to do anything at this point in time that’s different than what I do normally. I am an index investor and have an investment plan that is very straightforward. I maintain an overall asset allocation of 80% equities and 20% bonds. Once per year in January I recalculate where my percentages are at based on how stock and bond prices have changed over the year. If stocks have gone up relative to bonds, then my percentages may have shifted to 85% stocks and 15% bonds. I then robotically sell 5% of my stocks and buy bonds. I don’t look at the prices and I don’t think of the future. I just do it. This is a way to force yourself to “buy low and sell high”, a concept that seems simple but in reality is extremely difficult to accomplish. The only other time I ever rebalance my investments is when the overall stock market drops by 20% or more. The reason I do this is so I can take advantage of the inevitable market corrections. But in fact, if you look at the research and data on market timing, it turns out that in the long term, it really and truly does not matter when you invest, as long as you do it consistently.

But I still haven’t answered the question “Is now a good time to invest?”  Despite everything I’ve written thus far, I’m going to say yes. I have an optimistic view of the future and this current crisis doesn’t seem to foreshadow the collapse of the entire world order. If the coronavirus was turning everybody into zombies, then I might be thinking differently, but for now I see this is a severe, but short term shock. Of course three months ago, I thought this whole coronavirus would have completely blown over by now, so I was dead wrong about that.

Let’s think about all the things that may happen in the coming weeks and months that would turn around market sentiments.

- a medicine will be found to treat COVID-19, which greatly reduces the death toll
- a vaccine will be developed (remember, the entire global health industry is singularly focused on this right now)
- governments will provide massive bailouts to companies and people (already happening)
- cheap and effective COVID-19 testing kids will be made widely available that will allow us to more effective quarantine affected people and allow the rest of us to go back to work
- the % death rates could dwindle due to different conditions in different countries

Here’s some things that could happen which would further sour market sentiments.

- the infection rates explode across many countries
- the % death rate climbs higher
- the virus could mutate into something worse
- the economic pause could last longer than expected and prove too damaging for many companies, resulting in bankruptcies, job loss, and deep recession

So based on my prophecy, what am I going to do? Nothing. Doing something different would be messing with my long term plan and strategy, which has worked out just fine so far. Any money we save in the coming months will be invested like it is normally. If the market goes down, we’ll be buying them cheaper. If it goes up, we'll be buying them at a higher price. But in the long term, it won't actually make a significant difference to my overall results.

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