Fasten your Seat Belts There is Turbulence Up Ahead

The S&P 500 hit an all-time high on February 19, 2020.  The Coronavirus was already around, see here, and here, and here, but it looked like the market was going to shake off this concern and continue to zoom higher.   Maybe the average investor that begun to invest in the market after 2010 expected nothing more – even the double-digit downturn in late 2018 was followed by a record year in 2019. 

Things have changed, the Coronavirus has taken hold in the United States, and companies and corporations are taking actions that will slow our economy for at least several quarters.  On top of that the Russians and Saudis are having a pissing contest over the production and price of oil which is not helping the market.

I am seeing a change in people’s behavior due to their reaction to the coronavirus from my own experiences.  Yesterday, I was out with my family at one of the busiest malls in Orange County, CA.  For the last 10 years we have always had to park on one of the upper levels and the restaurants have been packed with 45-60 minute waits to get a table.   My wife and I were coming from a sports practice for our kids and we did not want to cook so we decided to try to head to one of the restaurants.  We found a parking spot on the first level immediately.   We could go wherever we wanted to eat and probably not have more than a handful of people eating in the same restaurant.  We chose a place with three servers and five customers.  We saw no more than fifty people in the entire mall while we were there.   Granted, it was a Tuesday but I am going to head over there this weekend to see if things are any different.  This is my most recent example of how human behaviors have changed after the virus hit our shores.

The market has begun to price in a recession and is heading towards a bear market.  As of mid-trading today (March 11, 2020) the S&P 500 had dropped 18% from its recent all-time high and bear territory is in sight with earnings updates from companies less than a month away.

Goldman Sachs, the prestigious investment bank that doesn’t always get things right but which investors listen to, just came out and said the bull market is about to be over and we could see another 15% drop in the major stock markets by mid-2020.   This would put the markets at 30% below their recent all-time highs.  Ouch.  Goldman is also predicting a recovery with the S&P getting back above 3,000 by the end of 2020.

For Those Trying to Maintain Their Financial Independence During a Downturn

I have the majority of my investments in real estate (at very low leverage) and in an All-Weather Portfolio that generates passive income for me but that is not highly correlated to the stock market.  You can see below how my All-Weather Portfolio has performed so far compared to the S&P 500 and my dividend portfolio. 

My All-Weather Portfolio is down 2% compared to the S&P 500 being down 18%. 

As I have discussed, gold tends to be inversely correlated to the stock market and it has gone up since the market started melting down last month.

Real estate prices are not highly correlated to the stock market and investments in real estate debt continue to perform as long as real estate values securing the debt do not fall significantly.   

My All-Weather Portfolio managed by my financial advisor has gold, real estate, and real estate debt as part of its investments and therefore it has been less volatile than what you are seeing in the stock market.   I will be writing in detail what my All-Weather Portfolio consists of when I give my first quarterly financial update. 

I am not suggesting selling right now but at some point you need to determine if you should re-allocate your portfolio to something beyond stocks, mutual funds, and ETFs.

For Those Trying to Achieve Financial Independence

Try to Get Some Benefit from this Market

I’ve talked about taking advantage of this situation the best you can – see here. 

• First, everyone should be refinancing their debt.
• Second, If you have cash you should be deploying it at certain times into good companies that have had their stocks hammered. 
• DO NOT DEPLOY ALL OF YOUR CASH AT ONE TIME AND ONLY USE CASH YOU DO NOT NEED FOR THE NEXT SEVERAL YEARS.      

Develop an Approach to Invest in this Market

I have most of my investments in my All-Weather Portfolio and in real estate investments but I do have a dividend portfolio with 40% cash and a plan to invest in this market.  For those who have cash on the sidelines with years ahead of you before you plan to retire and need the cash then you should be thinking how to invest in this market for potential upside a few years from now.

Here has been my personal approach to buying stocks right now with available cash:

1. Buy in tranches.  I have put my available cash (not including emergency fund) into four tranches.   I am buying stocks one tranche at a time.  I have used two of my tranches (the second one just this week) but my next tranche of available cash will not be deployed until the S&P 500 gets into bear market territory and below 2,550.  My final tranche will not be deployed unless the S&P 500 gets below 2,450.
2. Buy quality companies with strong balance sheets or reasons for long-term upside.  I have several types of companies that I am buying:
   • Quality tech companies – I am buying big tech companies like Apple and Microsoft.  Their long-term growth prospects remain positive and they have very strong balance sheets.
   • Quality industrial companies – Companies like Caterpillar, Cummins, Genuine Parts, and PPG are getting hammered with the prospects of a recession.  These companies kept paying their dividends during the financial crisis and they should keep doing so here.
   • Select REITs (multi-family, office, retail only if very strong balance sheet) – I believe a very low-interest rate environment and more injected capital by the Fed will be a positive for real estate assets over the next several years.   The companies can refinance their debt at even lower levels and continue to collect the rent. 
   • Travel-related companies – This I where I am adding more risk with the prospect of greater future returns.  I believe great companies like Disney, Delta, and Royal Caribbean will see things get a lot better after the virus is contained.  Airlines should actually benefit from low oils prices once the virus is contained and flying begins to return to normal levels.
   • Banks and Oil Companies –  This is high risk investing for me because banks will struggle in a really low interest rate environment to make significant profits and oil prices could stay low for a while because the Russians and Saudis can outlast the U.S. shale companies if oil prices stay low for the remainder of 2020.  That being said there is meaningful long-term upside with these stocks because these companies are at multi-year lows, banks are much stronger than they were during the financial crisis, and I am buying companies in the oil sector that are less exposed to low oil prices and that have lower levels of debt.    I could see some losses here if the oil companies I choose cut their dividends so I am only putting a small bet on these companies.
3. Expect to hold onto these dividend paying companies for several years.  My investment horizon on these stocks is at least 3-5 years because it may take a while to see a recovery for some of these companies like those in the cruise industry.  All of these companies pay dividends so even if I have to wait for several years to see appreciation in their stock prices I am adding to my passive income levels in the meantime. 

I will report in detail on my dividend portfolio after my cash on hand in this portfolio has been fully invested.

You can come up with your own plan but I believe the smart money is starting to nibble on buying opportunities, or at least preparing to do so, and there is no reason why us average investors should not be doing the same if we can afford to wait for the recovery.