How long will the Covid-19 affect the markets? How should everyday investors react?

  • Nobody knows how long will the pandemic last. Obviously, the longer the worse and there is no indication of slowing down.
  • Nobody knows if people who get sick will have immunity over the next potential virus wave.
  • Nobody knows how the transition period back to normal economic activity will be achieved and how long it will take.
  • Nobody can estimate the real economic damage to the backbone of the economy → SMEs.
  • Nobody can estimate the second derivative of the sell-off effects, i.e. what will happen with the fallen angels and lack of liquidity.
  • Death rate varies between 0.5% — 7%, depending on population age, ICU coverage and extent of population testing.
  • Most of the patients do not present symptoms for many days, which makes the virus extremely effective in spreading.
  • No vaccine is expected before the next 12–16 months.
  • Almost 50% of US corporate debt is BBB rated now and with most of the world’s population being under lock-down, it is no rocket science that big part of them will fall below investment grade.
  • Almost 3.3M Americans filed for jobless claims last week. This is 5x the previous record of 1982.
  • The Fed’s balance sheet just exceeded $5 trillion for the first time.
  • Markets are deep into bear market territories.
  1. You cannot time the market. You never could and definitely cannot start now. So, instead of guessing whether stock markets are going to rise or fall further after Covid-19, adopt a longer horizon. Get some exposure in the stock market but do it for the long run. There is no point to pick the best mutual fund, as most of them underperform the markets. Go for a cheap ETF. Robinhood or Vanguard will probably do for most jurisdictions.
  2. Normal diversifiers like corporate bonds are always necessary for an all-weather portfolio. However, keep in mind that in every liquidity crunch most of the risky assets move together and move downwards.
  3. Safe havens, like government bonds (US, Germany, UK) still have their place in your portfolio.
  4. Look for market-neutral alternatives. This can be alternative types of exposure, investment styles, methods, etc. Look for market-neutral assets and funds. At the toughest periods, the market-neutral investments will keep your portfolio beating.
  5. Keep some cash. Not only as a safe haven but to also exploit opportunities when you identify them.
  • Very high capital requirements. Most of the top-quality market-neutral Hedge Funds, typically require at million $ tickets as entry requirements.
  • Lack of liquidity in this fragmented industry. Your capital is not always accessible immediately and this is something not every ordinary investor can afford.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store