How should I invest my money during the coronavirus crisis?
This answer might shock you because it will show why investors during the Great Depression, actually could have made a profit barely a few years later……but more on that below.
Firstly, a good investor should imagine they are controlling a catapult.
You need to load it with “balls”. The more balls you loads into the catapult, the better for your “attack”.
This is what an investor often needs to do. In your working years, you need to fill the catapult with units, and then “fire” (sell) these units in retirement.
The lower markets get, during the virus, means the more units you can “fill up on”.
So take the Vanguard Total Stock Market ETF (VTI) as an example.
The price now is $123.31. So if you have $15,000 to invest today, you can buy 121.64 units.
In comparison, imagine the price was $62 – about half of what it is now.
In that case you can buy 241 units. So rationally speaking, a young investor should want markets to fall, and somebody approaching retirement should want them to rise, as they will want to be net sellers.
I will give you a simple example of somebody profiting from the Great Depression.
Let’s say somebody bought the Dow Jones in 1929 right at the outset of the biggest financial crisis ever – I know index funds weren’t available in 1929 but stay with me when I illustrate a point.
Let’s keep this simple and say they invested $10,000 a year (adjusted for inflation) from 1929 until 1960 when they retired.
They would have made an absolute fortune. More than if markets had kept going up in a straight line!
In fact, they would have made about 12x-14x more than they put in, despite all of the deflation of the 1930s.
Why? The markets had a brutal 90% fall from the absolute peak to the absolute bottom and stayed low for years.
So during those years that young invested (or even middle aged person) in the early 1930s, could have “loaded up” his balls for the catapult for a few years.
What about somebody with a lot of money already invested?
You might say, the last example only works because somebody who invested $10,000 a year (inflation adjusted) from 1929 until 1960, only invested during a few “awful years” when they had less invested.
In other words, it wasn’t as if they had 100k invested on day 1. They were only getting started during the worst of the crisis.
So let’s look at another example:
“Person 2” had a 100k lump sum (inflation adjusted again) invested in 1929 + they add 12k a year in each subsequent year.
How scary you might say! They invested 100k just before a 90% decline!
So how many years would it have taken their portfolio to recover?
1930 = 112k contributed. Account value = 76k. A big drop
1931 = $124k contributed. Account value = 54k. A massive drop
1932 = 136k total contribution. Account value = 54k. An even bigger drop!
1933 = 148k contribution. Account value = 90k. Green shoots!
1934 =160k contribution. Account value = 98.7k
1935 = 172k contributed. Account value = 150k
1936 = 184k contributed. Account value =……….232k!
So the account is up substantially within 6–7 years of a Great Depression…..despite having a decent sized lump sum at the beginning!
The reason is simple. Markets might have declined 90% from the very top to the very bottom, but by patiently investing during this down market, this investor has “filled up their catapult with units”.
And that isn’t factoring in:
- Deflation which was huge in the 1930s
- If you rebalanced from bonds the figures above would be huge
- Of course if this investor would have carried on for 10–20 years more, the returns would have been bigger.
A more recent example – The Nasdaq
From 1995 until 2018, the Nasdaq produced about 12%-13% per year for a lump sum investor but from 2000–2002, it fell by 76%!
Yet somebody who bought extra units during that period would have gotten even higher than 13% returns for obvious reasons.
Why? The Nasdaq was 900 in 1995. 5,050 before the crash in 2000.
It hit 1,200 at the bottom in 2002 and stayed low for years, before hitting 10,000 1–2 months ago, before the recent fall. It also fell a lot in 2008.
So somebody who rebalanced from bonds into the Nasdaq from 2000–2002 and 2008–2010, and monthly invested via their salary, could have made up to 15% per year, by taking advantage of the lower valuations.
I am not implying that people should focus on the Nasdaq over the S&P500.
I am merely saying an investor shouldn’t fear big falls if they rebalance and/or are young enough to deal with the volatility.
So surely an investor should just wait for the right time to get into the markets?
It isn’t that simple. Nobody can predict what will happen to markets, even though they have always historically came back to hit record highs.
So the easiest thing is just to buy index and bond funds. Short-term government bonds went up during the last month, but medium term ones fell.
If you have $100,000 invested and $70,000 is in markets and $30,000 is in government bonds, and markets dip again, add more and rebalance from the bonds.
Don’t try to focus on if your portfolio is going up or down during the crisis.
Focus on what things will look like in 20–30 years or whenever you plan to retire.