My FP Down to Business podcast on the Crash of 2020 and how to deal with it

The Financial Post has just published a podcast about the market impact of coronavirus, via a conversation between me and FP transportation reporter Emily Jackson, host of the weekly podcast Down to Business. You can find the full 19-minute interview by clicking the highlighted text: How Coronavirus market chaos compares to 2008. 

While I have been posting almost daily commentaries on the crisis right here on the Hub from various experts, thus far I have refrained from comment myself, but the podcast pretty much covers my views. One thing that came out of the interview was that there may be big generational differences in how this market crash is viewed.

For baby boomers who are retired or thought they were close to it (read “me!”) this crash has been a traumatic experience, especially for those who didn’t pay much attention to risk management and appropriate asset allocation. At our age (I’ll be 67 in a few weeks), we presumably have finished accumulating our nest egg and our time horizon to recoup any losses is shrunken: young people are in quite a different situation: they have less money to lose and have several decades to get it back.

Worried retirees should be at least 50% in fixed income by now

Fortunately, we have been quite conservative: my own advisor has long counselled being somewhere between 50 and 60% fixed income and — having been reminded of the downside risk of the market yet again — I have been selling a few winners where we can find them with the goal of getting our total cash and fixed income to about two thirds of our total portfolio.

We took some profits as the 11-year bull market raged, although of course hardly enough to dodge the storm entirely.  As with most investors, Covid-19 was a “Black swan” that seemingly came out of the blue. I guess I was lulled into believing that the US president would keep the markets aloft at least until he was re-elected, by leaning on the Federal Reserve chairman and various other levers he possesses. Fooled us again, Donald!

Some readers and at least one advisor I correspond with probably think 67% fixed income is too conservative, but that’s right in line with the conservative rule of thumb that fixed income should equal your age. That leaves about a third in (mostly) non-registered stocks, although we also hold US dividend paying stocks in our RRSPs, along with fixed income (bond ETFs and laddered strips of GICs). Our selling inside our RRSP has been more along the lines of selling half of big winners and “playing with the house’s money,” a phrase our daughter has happily adopted too.

On the other hand, as I remarked to Emily, it’s much less of a disaster for younger people: in fact, I’d argue it’s almost good news, financially speaking (not of course from a health perspective). Finally, younger investors have an opportunity to buy stocks and equity ETFs at reasonable prices, and at the same time as interest rates fall, they are getting a break — or soon will — on variable-rate mortgages.

Certainly if I were 20 years younger I’d be itching to buy at current prices, although even then I’d keep some powder dry just in case the bargains become even more tempting.

How bad could this get? In yesterday’s FP, David Rosenberg frankly raised the spectre of a depression and total losses in the Canadian market of 50% or more. See It’s time for investors to start saying the D-word — this economic damage could be double 2008.

Too late to ‘revaluate’ your risk tolerance?

A blog the Hub republished on the weekend from Michael James on Money suggested that now is not the time to reassess your risk tolerance. See It’s too late to ‘revaluate’ your risk tolerance. That blog generated a fair bit of discussion on Twitter. Again, this could fall along generational lines. If you believe markets are only half way down and you want some cash to deploy to scoop up bargains at the bottom, then you can sell down some non-registered winners and losers, ideally in equal proportions to make it net tax neutral. Massive up days like Tuesday are an opportunity to do that.

Michael (who’s real surname is Wiener) rightly argues that buying high and selling low is losing money no matter how you rationalize it. Some investors who may have been overweight stocks may make the judgement that it’s acceptable to lose some of their money if the net result is to salvage what remains and to be able to sleep at night.

Others, presumably younger folk with a high risk appetite — and who aren’t depending on their portfolios for income to live on — can certainly stay the course and snap up the many bargains as they appear in the next few months and years. I have no doubt that as happened in 2008, by the time we’re done you’ll find Canadian bank stocks yielding north of 10%. Only problem is that if you are too eager to buy the dips now, you may well find you have no cash with which to make these purchases at what may become drool-worthy low prices.

Another Hub blog published last week shows how those with a decent time horizon can navigate market crashes like the one we’re now suffering through. See How to get through a market crash — and benefit from it. It originally appeared on blogger Mark Seed’s My Own Advisor web site. While you’re on the site you can hop on to an interview Mark conducted with me last September: Passive and active investing can live in Retirement harmony. As you can see, Mark and I have similar views on how to invest, although I’m a bit older and hopefully closer to our mutual goal of achieving financial independence while we’re still young enough to enjoy it.

There were warnings by bloggers whose work was republished here on the Hub

While this has been the fastest crash in history — hence one can hardly call it an “all-clear” despite Tuesday’s 2,000 point rally in the Dow Jones — it’s not quite true to say there no warnings. In fact, several bloggers were alerting investors to Coronavirus as early as February. I’m thinking of CuttheCrapInvesting’s Dale Roberts, who kindly permits the Hub to republish some of his work. Sadly, we failed to do so with his prescient How to prepare your portfolio for the coronavirus outbreak: published on his site on February 1st! Dale’s thoughts on Risk Management and more recent blogs are just as relevant now, as we are still in perilous times, given that the most powerful leader in the world — I’m referring to The Very Stable Genius in the White House — has been slow to recognize the full extent of this catastrophe and continues to put dollar signs ahead of vital signs. Check the Twitter hashtag  #DieForWallStreet.

Then there was Toronto-based financial advisor John De Goey (Twitter handle @STANDUP_Today) who warned in the first half of February that we were in a Bubble, that the real risk might be market fear rather than the epidemic itself, and even presented one solution investors could adopt to protect their portfolios: Inverse ETFs. (Sadly, I didn’t use the latter myself but check the website of Horizons ETFs for details on inverse ETFs that profit as certain major stock indexes plunge: not for the faint of heart!)

Just last week, once the virus-spawned bear market had already hit with a vengeance, financial planner David Field gave retirees seven tips for dealing with the financial ripple effects of the Coronavirus. I believe his piece appeared here on the Hub first, and the gist of it was picked up a few days later online by the Globe & Mail’s Rob Carrick, who has also written several useful personal finance articles about this subject.

What I’ve been doing lately personally in our portfolio

I’m neither a financial advisor nor do I have a CFP or CFA designation to my name: I’m merely a financial writer, author and blogger who interviews real experts, or runs their guest blogs on my site. (this one). But for those who are curious I don’t mind revealing here what I’ve been doing, some of which came out in the interview with Emily.

I have been adding to a few pre-existing positions, mostly gold miners like Barrick and Newmont and funds holding similar companies; plus gold bullion through vehicles like GLD and BMG Bullion Fund, which I’ve owned for many years. I’ve always believed in a 10% strategic allocation to the precious metals asset class and now that the US federal reserve has announced QE Infinity, the printing presses are going into overdrive, which should be a plus for gold. True, gold sagged a bit in the last few weeks, but the explanation preferred by gold bugs was that gold stocks were a winner they could sell to raise cash for margin calls in other plunging securities. And so far this week, gold has been roaring back.

I’ve also taken a few tiny flyers on the “stay-at-home” stocks, some of which (like Netflix and Amazon) we have long owned, and other new purchases that have held up well in this crash even if they are looking pricey (Zoom and Teladoc to name two).

I mentioned the Vanguard (and iShares) Asset Allocation ETFs in the interview. These are a good way to handle this environment as they take care of rebalancing automatically. They range from VEQT, 100% stocks; to VGRO at 80% stocks/20% fixed income; to VBAL at 60% stocks, VCNS at 40% and finally VCIP at 20% stocks. VBAL most closely resembles the classic balanced fund or pension fund with 40% in fixed income. So if the market sell-off pushes stock down to 50% the ETF would automatically sell some bonds to bring stocks back to 60%, while if the bull market ever resumes it would do the opposite, selling stocks to bring them down to 60%, and adding to bonds to keep them at 40%.

If you have reassessed your risk tolerance belatedly but still want to invest at least partially in the market, I suggested that you could sell whatever Asset Allocation ETF you’re in and switch down to the one that’s one or two risk levels below. For example, switch from VBAL to VCNS, which may be appropriate for retirees in their 60s. Those in their 70s may prefer the most conservative one, VCIP. You can of course own more than one, and I do, depending on whether it’s an RRSP, TFSA or non-registered funds.

I don’t know how this all ends: whether we will experience a quick V shaped crash and recovery, or a U shape with us down awhile, scraping along the bottom a spell and eventually recovering. Hopefully it’s not an L! When I mentioned this on Twitter, one wag suggested a strong possibility: a W! With 2,000 point Dow moves in either direction, you can expect more of the same for weeks if not months.

As I said earlier, if you’re in the Retirement Risk Zone, we have now experienced that dreaded condition of Sequence of Returns risk. I find it easier to sleep with a healthy dose of fixed income and cash commensurate with our moderate risk tolerance, especially in registered portfolios. Yes, reconciling yourself to returns of 2% a year is a bitter pill to swallow, especially in a market that swings 10 to 15% on single days. By keeping some growth in non-registered accounts, you have the potential to earn more lucrative capital gains and collect tax-effective dividend income (if Canadian securities).

While I don’t adhere precisely to it, in the back of my mind is always Harry Browne’s Permanent portfolio, which is 25% stocks, 25% bonds, 25% cash and 25% gold. Stocks work in prosperity, bonds in deflation, gold in times of economic calamity and we all can use cash, whether to live on or to deploy opportunistically. I would also add a dollop of REITs or REIT ETFs although most of those have suffered extensive losses along with the rest of the Canadian stock market.

Since know one really knows what is going to happen, such an approach seems to me prudent. And not just now: after all Browne didn’t dub his portfolio the temporary one!