Mistakes of the investor in the crisis

There is no point in panicking to sell off assets when the fall has already happened, the indices will turn around, and it will be just as unexpected for you. There is no point in trying to guess the bottom and outsmart the market. It is categorically not advised to trade on your own with leverage in such a situation. Failure in this case is almost guaranteed. To relieve pressure on your investment portfolio, you can average out your equity positions a bit at a time or buy short bonds from first-tier companies.

When will the markets bottom out?

The worst consequence of the coronavirus for the global economy is uncertainty. Everyone understands that the recession is likely to be worse than in 2009, business profits will fall sharply, and unemployment will rise. But no one, not even professional economists, can say how bad it will be in three months, six months, a year.

The virus that causes the COVID-19 disease has inevitably “infected” stock markets. Exchanges all over the world have been feverish for more than a month. The main American indices show a record fall, as it was on March 16 (minus 12-13%), and then a record growth against the background of the discussion of anti-crisis measures of the USA government, as it happened on March 24 (plus 8-11%).

Regarding global markets, we can say only one thing with certainty: recovery and restoration are inevitable. It has never been the case that nothing has happened. The worse the current economic news is, the more likely the reversal point is near.

Stock markets lost over 30% at the peak of their decline and have reached 2017 levels. The bear market phase we are in today lasts on average about 14 months. The last crisis lasted from October 2007 to March 2009, when the S&P 500 Index lost about 57%. It is likely to take a considerable amount of time for quotes to recover to January 2020 values.

The positive news for investors is that the stock market crisis is not synchronized with the economic crisis. Indices are a leading indicator of the state of the economy, but they usually peak just before the recession begins, and a reversal can occur well in advance of the economy’s recovery.

Markets live with expectations and are sensitive to negative or positive news. If tomorrow they say that the number of people getting sick has dropped dramatically, or suddenly there is news of a coronavirus vaccine, the markets will immediately turn on expectations and euphoria. Although the negative effects on the global economy will be in effect for a long time to come.

Determining the moment of maximum decline, and therefore the best time to enter is almost unrealistic. Some analysts believe that the bottom of the stock markets is closer than one would expect and that stock prices are somewhere near their most attractive values.

Despite all the fears and misgivings, Google Trends’ research shows that asking “which stocks to buy” is more popular than ever. That does not mean that people will rush to buy stocks tomorrow or the day after, but we can assume that they are making a shopping list to try to enter on the best day of the sale.

With the current volatility of markets, any manipulation of investment instruments carries increased risk. For yourself, you must calculate all scenarios, including the most negative. It is difficult to abstract away from the general panic, but you must understand that the worse the situation is, the more opportunities to make money in the medium and long term. After any crisis the market recovers. The question is the timing and the reference point.

Here are some basic recommendations on how to behave during the crisis, what exactly not to do, what actions can be taken to reduce the pressure on your investment savings.

Mistake One: Sell in a panic in a market downturn

According to statistics, the maximum inflow of funds into investment funds is observed at the peak of the market, just before its fall (e.g. February 2020). If we recall the years 2008-2009, the largest outflows are just before the reversal.

In the more or less long term, you won’t lose your investment if you invested in stocks or bonds before the pandemic. It is unlikely that a large number of companies around the world will go bankrupt unless they were already on the brink of bankruptcy before the crisis began. Consequently, they can continue to operate, make profits, pay dividends, and pay their debts. Sooner or later, securities prices will recover and go up.

To sell your assets during the crisis and fix losses of 20-30% of investments is the main mistake of all investors. We do not have enough patience, psychologically at such moments we always expect the worst. You have to understand that fundamentally little has changed, in the face of the crisis all securities are equal. If you have a balanced strategy, correctly defined the investment horizon, formed a portfolio by the risk profile, all you have to do is wait for the reversal.

Mistake number two: take a hit – it’s getting cheaper

Don’t try to outbid a volatile market, especially with leverage. The other extreme is trying to guess the bottom in falling markets. An investor may decide for himself: now I have seen everything, both rising and falling stock markets, I am well-read enough to determine the right moment to enter. A person decides that since the market is already down so much, this opportunity should be seized. Just yesterday company X’s stock was $100, and today it has fallen to $70.

He begins to trade independently, accumulates credits, opens leverage at a broker, and loads all the money in some, in his opinion, attractive positions. Leverage is the investor’s worst demon and the broker’s bread and caviar. Trying to predict movement in a volatile market is the second fatal mistake.
Markets behave unpredictably: after two days of fixing a fall to stop-limits, when exchanges, according to the rules, are forced to suspend trading, the next day some securities and indices may rebound by 5%. Within such volatility, a move of every cent (whether its bets on a rise or a fall) in the case of leveraged trading is a huge loss. 90% of the time, the investor takes a loss.

No one can predict today when a reversal will happen. It is more likely that indexes will continue to move downward and many stocks will lose tens of percent more in value.

Mistake number three: buy dollars and convert all funds to foreign currency assets

The ruble was tied to the price of oil 30 years ago, 10 years ago, and will be tied for the foreseeable future. If you weren’t born yesterday, the dollar at 80-85 rubles shouldn’t be a surprise to you. There’s no point jumping into the last carriage of a departing train. Ask yourself why in calm and prosperous times, when you had free money, you did not buy foreign currency assets?

Running to the exchanger and buying foreign currency at a spread of 84-85 rubles (at the current dollar rate at the MICEX of 81 rubles) or the urgent sale of ruble assets and buying instruments in foreign currency may be too late, unprofitable. You won’t gain anything even if the dollar rises another 10%. Take the current story as another lesson.

What currency should I keep my money in 2020? – Read the article.

Work on your mistakes: how the economic crisis is useful

We can assume that if you didn’t follow our simple advice, you lost quite a bit in the moment. Nothing catastrophic has happened. In the long run, you won’t lose your investments if you don’t panic. The crisis and the quarantine that coincided with it for many is a good time to analyze your mistakes.

You probably realized the following basic things:

  • You should always have a safety cushion, liquidity that will allow you to maintain your current standard of living for six months, or better yet, without receiving a regular paycheck.
  • Invest only free funds, which you definitely will not need at any rate for a long period. The most profitable investment horizon is from three years. In this interval, any of the most severe crises will run out of steam, you certainly will not go into deficit.
  • Diversification is not simply a variety of securities in a portfolio, it is a certain degree of neutrality to the market. It implies a currency component, the presence of protective assets on which it is almost impossible to make money in lean times, but which will reduce the pressure on investments in a crisis.
  • Risk profiling is not an empty formality. It is in a crisis that you have the opportunity to get a feel for how correctly you have defined your attitude to risk. There’s no need to deceive yourself or the program by answering the question of how much market drawdown you’re prepared for 30%.

At the peak of the influx of investments in late 2019 and early 2020, many people went in with no experience and bought everything, not caring too much about diversification and risk appetite. If the portfolio consisted only of stocks and bonds, with no other defensive asset classes, the weighted average result was extremely negative. You can’t just walk into the market, pour all your money into stocks when they’ve been in a rising trend for 10 years, and live in peace. That doesn’t happen.

99% of investors make mistakes. The main thing is not to let these mistakes be fatal. It doesn’t matter how your strategy works in growth markets, what matters is how it will perform in a crisis, even one as unconventional as the current one.

How to reduce investment losses in a crisis

The best thing to do for now is not to make any sudden and ill-considered steps. Over time, stocks will recover their positions. If your portfolio contains debt securities from companies with a good credit rating, you will in any event receive a percentage of the return to maturity.

If you have free funds, you can try to reduce the negative pressure on the investment portfolio, where there is already a serious downside, and start averaging positions. That is, in small portions buy positions at current prices, so that the average purchase price is lower. This must be done accurately, by small amounts, keeping in mind the horizon of three years.

You can try to pick up individual trends by industry. For example, some telecommunications companies are doing well in the market. But again, it should be done with the understanding that the risks are now heightened. You can buy units in diversified broad-based funds or ETFs at current levels with a small amount of free money.

One option today is to slowly buy foreign-currency debt securities of sound companies and invest in short, high-quality bonds that have fallen in price. At the moment, these securities are down 3-7%, depending on the term to maturity. Taking into account the coupons that were paid before the fall (about 8% per annum for first-tier issuers), as well as drawdowns, it is possible to fix a yield of 12% per annum for yourself over the course of one year.

 

Remember that any crisis passes. A smart investor learns from his own and others’ mistakes.

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