Before the Covid-19 correction, markets were priced to the brim of perfection. Consequently, the introduction of any meaningful bad news for the economy, particularly something as unexpected as the Covid-19 pandemic, was bound to wreak havoc. The violent sell-off in equities since late-February is evidence that the market and investors weren’t preparing for risks to materialize, and the daily volatility is enough to test anyone’s grit.
However, sell-offs shouldn’t be viewed as scary events. Rather, they should be viewed as opportunities to make good long-term investments at discounted prices. Here are some tips for how to manage client portfolios in the current environment:
Tip 1 – Think About 2025 Instead Of 2020
A massive amount of what we read and listen to will be about the virus, its impact on the economy, and how bad things might get. It’s all very interesting and keeps our eyes glued to the TV for the moment. However, investors purchase long-term future cash flows. When making investment decisions, it’s best to keep your eye on the prize. Think about the year 2025 instead of the year 2020, and ask clients if they think the economy will be normal again by then.
For example, do they think that consumers will still drink Pepsi five years from now? Will they still need health-care and consumer products from Johnson & Johnson? Will they use Google to search the internet? Will they continue to find value in Amazon Prime? Will they continue to purchase products, services and subscriptions from Apple or Microsoft? Clients will realize the answer to these questions is a resounding “yes." You might use this thought process to reassure them that there are still long-term opportunities even in a worrisome, choppy market.
Tip 2 – Think Conceptually
If you’ve decided to put some money to work with a long-term perspective, then you’re probably wondering where to invest. We recommend weighing investments conceptually rather than one company at a time. I ask clients to think of the following conceptual categories:
• Quality
• Quality companies won’t offer the deep discounts that some other areas will, but they are the first place to turn for safe investments in things that will help us sleep well at night.
• Rapid Growth
• Companies benefitting from long-term, sustainable trends that will carry them through this unique period.
• Covid-19 Deep Value
• Stocks in the casino, leisure, hotel, cruise, airline and other industries severely impacted by current events. This is for the most aggressive and risk-tolerant investors. Any attempt to pursue this category should probably be done in a diversified fashion, across many companies in many industries through mutual funds or exchange-traded funds. One could also continue to buy more as the prices of these investments move lower, a concept called “averaging down”.