- Investment Workshop 59: Are Robo-Advisors Compatible With FIRE? - June 22, 2020
- Reader Case: Grounded in Vancouver and Dreaming of FIRE - June 19, 2020
- Real Estate Agent Gets Crushed by Real Estate Math - June 8, 2020
The definition of a black swan event is an unexpected event with major negative consequences, and the key word in that description is “unexpected.” If you had asked me at the beginning of 2020 (and many people did) to guess what would cause the next stock market crash, I would have said the US-China trade war, or maybe Brexit, or at very least something to do with Trump and the upcoming US election. A coronavirus pandemic? No way in a million years would I have guessed that.
The coronavirus known as COVID-19 has dominated the news coverage in a way I haven’t seen in a long time. For months now, it has seemingly occupied a permanent spot at the top of every news site. There are live streaming news blogs about it that update every 10 minutes, with a live running tally of the number of people infected beamed to people’s phones. And now, the coronavirus has spread from Asia into every continent (except Antartica) and turned it into a truly global pandemic.
And oh yeah, the stock market noticed, didn’t it?
Volatility is Back!
On Feb 27, the Dow suffered it’s worst one-day point drop in its entire history.
The Dow dropped 1,191 points, or 4.4% in its worst one-day point drop in history. The index has fallen more than 10% below its most-recent peak, putting it in correction.
This was quickly followed by the best one-day point increase in its entire history.
US stocks rebounded sharply on Monday, with the Dow logging its biggest point gain in history.
The last few weeks have seen straight daily swings of over 100 points points, and the odd thing is it’s not all in one direction. The stock market is yoyo-ing like crazy, a sign that traders can’t seem to agree on what the news about the coronavirus even means.
I actually haven’t seen this kind of volatility since 2008/2009, and even back then 1000+ moves in the Dow Jones would make front page headlines. Now, that kind of price movement is happening so frequently that not every zig zag up or down is reported anymore.
These are, to put it mildly, very unusual times.
Is The Coronavirus Outbreak Another 2008?
Let’s pretend for a minute that I was in the financial predictions game (which I am emphatically not), and I told you that my mathematical models/technical analysis/crystal ball told you definitively that yes, this is a repeat of 2008.
What would you actually do?
While 2008 was actually happening everybody was panicking and screaming the sky was falling, but today, in 2020, we have the benefit of hindsight. We know what eventually happened. The stock markets plummeted like crazy for 6 to 12 months, then rebounded sharply in 2009. What then followed was over a decade of an almost uninterrupted bull market.
What seemed like an economic collapse at the time turned out to be the biggest buying opportunity for the stock market in decades. People who had the intestinal fortitude to resist the urge to dump everything and move into cash and instead buy into the storm (like us) ended up recovering all their money in about a year, and then went on to enjoy the rampaging stock market performance that saw their wealth grow like never before. Some (like us) even managed to retire.
So if you knew for certain that this coronavirus panic was the beginning of a 2008-style stock market meltdown, the only rational thing to do would be to treat this as a massive buying opportunity and pick up as many index ETF units as you can while they’re on sale.
Now the big question is: How many people do you know would actually do this?
I’ve said before that the stock market is only in one of two states:
- Stocks are too expensive. You’d be an idiot to buy now.
- Everything is on fire and collapsing! You’d be an idiot to buy now.
For the longest time, stocks have been in Situation #1: Too expensive. Just a few weeks ago I met up with a reader who I later learned was sitting on over a million dollars in cash. He had sold his business and wanted to invest like we did, but stocks were just too expensive. If only he had gotten in when P/E ratios looked more reasonable, he wouldn’t have gotten priced out of the market.
Well, as they say, be careful what you wish for.
A truism in the stock market is that the swing from Situation #1 to Situation #2 is never gradual. Everything is fine until it isn’t, at which point panic and fear set in, which causes people to react emotionally and sell, which just exacerbates the crash, and onwards and onwards in a powerful fear-cycle.
That’s what happened here. The COVID outbreak started in mid January, and even while it was spreading out of control in Asia, the stock market still marched higher for a while. And then something mysterious flipped and now everybody is in extreme panic. How long and deep this volatility lasts nobody knows, but however long it does last it’s going to feel scary. It always does.
Should you dump everything into the stock market?
So what should you do? Am I saying that now is the time to take all that cash you were sitting on and dump it all into the stock market?
No! I would never say that, because that would be market timing.
If you’ve been following our Investment Workshop but waiting for a good time to start investing, here’s what you do. Take the cash you intend to invest, divide it up into 24 equal amounts, and invest each portion twice a month, once at the beginning, and again on the 15th. This is called Dollar Cost Averaging.
The reason why we do this is to manage your emotions. Stock market crashes are scary, and investing during a stock market crash is even scarier. If you’re sitting on a large pile of cash and you’re trying to hit the exact bottom in one lump-sump transactions, you’re going to freak out. Most likely, you’ll freeze, never invest, and miss your opportunity.
Dollar cost averaging is how you invest during a downturn because it spreads out your bets over a longer period of time. Remember that during the 2008 crisis, the S&P 500 took about 10 months to plummet from peak to trough. By using dollar cost averaging to get into the markets, you’ll be sure that at least some of your money will get in at the bottom and you won’t miss out on the best deals.
I don’t know if this is the start of a 2008 style meltdown, but I don’t think this market carnage is going to go away anytime soon. For early retirees like me, I’m sitting here getting a $8 foot massage, and counting the money coming in from my Yield Shield. I could care less about the day to day stock market fluctuations.
But for the vast majority of people out there who are still in the accumulation phase of their retirement, and messaging me daily complaining about how markets have been too expensive? Well, here’s your chance. If you want to achieve FIRE, you’re going to have to invest when others are fearful, and right now boy are others fearful.
Time to put on your big boy/girl pants and put your money where your mouth is.
Do you think that the coronavirus is the black swan event we’ve all been waiting for? Is this the start of a global recession? Let’s hear it in the comments below!
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Earn a 2%* everyday interest rate. No Everyday Banking Fees.: Open up an EQ Bank Savings Plus Account! (Canada only, excluding Quebec)
LIMITED TIME OFFER: Earn up to 4% cash-back (Canada): With Tangerine's Money-Back Mastercard!
Travel the World: We save $18K a year by using AirBnb. Click here to get $40 off your first booking!
Don't Pay FX fees: We used the Scotiabank Passport Visa Infinite card to eliminate foreign exchange fees around the world! Plus, we got 35k points in the first year, and free airport lounge access too! Click here to sign up!
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.