The COVID-19 virus, also known as the novel coronavirus has taken quite a toll on the markets. As more and more investors grow into fear that the market takes a path downwards. Today we will discuss the likelihood for the COVID crisis to go from a financial disaster, over to an economic disaster, as well as what you can do to protect your assets.
First, we know the death toll of the novel COVID-19 virus is low. For most of the general population, the worst we will feel is cold-like symptoms, while some may not even experience any symptoms. On the other side, those who suffer from cardiovascular problems, diabetes, or old age are those who might get serious symptoms, even death.
Arguably it is not the virus itself that has caused havoc, but it’s the government’s restrictions, to ensure the virus does not spread further. Here one can agree, or disagree with the government, but the fact they are at least trying is comforting me.
So, the real question, should you be concerned about the markets?
To answer this question, we need to look at the underlying problems in the economy. Until this point, the COVID-19 virus has started what most people recognize as a financial crash. For instance, some days ago the Dow Jones dropped 2,353 points in a single day. This is the worst drop in history. This record did not last long, as it was broken by another 2.997.10 drop just three days later. Simply said, stocks are being shredded to pieces, and we need to ask ourselves if this is the time to buy. There is, in fact, a difference between financial meltdowns, and economic meltdowns. A financial crash will always hurt the stock market, but not necessarily hurt the underlying economy too much. Whereas an economic crash hurts the financial markets as well as the underlying economy in the form of high unemployment, low ability to pay back loans, increased inflation and so on. We are in a financial crash. Even though people are not showing up to work, products are not being produced and so on. It is not because demand is drying up, it’s mostly because of governmental restrictions. The same restrictions that governments will stop should disaster be imminent.
Therefore, I do confidently believe in the market’s ability to turn bullish.
And thus, I will buy stocks at these low prices. But as a precaution, in case I am wrong, I have laid a plan to protect my wealth in either scenario. The worst-case scenario is that COVID-19 takes such a toll on the market, that investors see no hope, and panic sell. This can, and likely will, lead to an economic meltdown. Under normal times, I would see this highly unlikely based on the danger of COVID-19, but since the underlying economy is far from good, I see it as at least a possibility. We know the US economy is loaded with debt. From student debt to auto-debt, private and corporate debt, even governmental debt is at an all-time. This is not only true for USA, but also countries like Japan, China, Italy and so on.
Protect our wealth.
This is my detailed plan to protect my wealth, first and foremost, consider gold as an asset in these times. Gold has been used as money way longer than paper money, and paper money has been pegged to gold up until quite recently. Gold is often seen as an asset that holds its value over time, especially as an hedge. Together with gold, I would also consider cash. Both are good to have in times of financial disaster. I would see a minimum of 20% of the portfolio in gold/cash.
Divide total investment
Dividing the total investment is my number two-point to protecting one’s wealth, and being able to buy cheap. The idea is simple; you find a company that has dropped substantially in value, for instance, Disney. Instead of buying the stock right away, you divide the total of shares you want to buy by three. This way you can buy 1/3 now, 1/3 at a later date should the price continue to drop. And the last 1/3 you wait until one of two things happens. Either the crisis is averted, and a vaccine is on the market, or the disaster continues and ends up disabling the whole market. Let’s say hypothetically 1929 all over, well imagine how much stock one can get for that last 1/3. If you diversify it well enough, it will set you up for the next decade. As Baron Rothschild once stated, buy when there’s blood in the streets, even if the blood is your own.
Following this approach, you will be able to buy at todays prices, average down should the price continue to decline, and have 1/3 on the sidelines for times of full crisis, or to buy should the crisis be averted.
As always, thank you for your time, and trade safe.