The US Economy Won’t Recover For Awhile, So It’s Time to Optimize for Recession.

Here’s three things you need to do today to protect your financial future.

Jonathan E
May 10, 2020 · 8 min read

Author’s Disclaimer: I am not a professional financial adviser, and this article is not intended as professional investing advice. Any and all recommendations herein are exclusively from my own personal study and experience.

A couple of months ago, I wrote this article, about how trying to time the market to take advantage of the so-called “Coronavirus Dip” was a risky proposition, and how the safest thing the savvy investor could do would be to do nothing. I still stand by that advice; making no significant changes to your portfolio, or your plan, is always the safest thing you can do. Giving in to irrational pessimism or untethered optimism are both signs of the same lack of emotional regulation in any market. And that, my friend, will cost you money every. single. time.

That being said, I also have to admit that sometimes, the safest thing to do is not necessarily the right thing to do. For the vast majority of the time, leaving your portfolio untouched, regardless of what the market is doing, is the right thing to do, as well as the safest thing to do. The times that we’re currently experiencing, however, I believe are unusual. And, I also believe that there are steps to be taken that might prove quite profitable for the savvy investor.

Let’s say that you’re one of the fortunate ones in the midst of this crisis. You have your health, you are still collecting a normal paycheck, and you have the financial means to continue to invest as you would normally do. If that is not your financial story, please know that there are many dozens of excellent resources out there to help you out during this difficult season. For more on those resources, click here, here, and here.

Assuming that you have the financial means to continue investing as you normally would, now might be a good time to make a few adjustments to further optimize your investment portfolio to take advantage of “bargains” or the lowered expectations of the stock market. As Benjamin Graham wrote in his foundational work The Intelligent Investor, “The intelligent investor is a realist who sells to optimists and buys from pessimists.” Surveying the landscape of the global stock market these days, we may find many, many pessimists, and not a few optimists looking for a massive rebound in the near future as well. Whether that rebound will come sooner rather than later remains to be seen. Here, then are three practical things that you can do, starting right now, to not only prevent unnecessary losses in your portfolio, but perhaps even optimize your portfolio further to take advantage of the state the market is in currently.

1. Adjust Your Mindset

This is the first, and most important step, you can take to achieve financial success in the stock market. The best way to start out optimizing your portfolio is to conduct a mental inventory, and make sure your head is in the right place with relation to the stock market. Now, more than usual, you must remove emotion from the equation. Whether you feel hopeful about economic recovery, or you feel despair about economic catastrophe, these feelings will not help you make sound financial decisions. Your mindset must be one of calm, and of understanding a couple of fundamental things about the current state of things.

The discipline of value investing, first described in detail by Ben Graham in the book alluded to above, reminds us of the fundamental mindset shift that the savvy, unemotional investor must make in order to succeed; we have to stop viewing stocks, options and mutual funds as inherently valuable in and of themselves, and remember that these instruments represent fractional shares of ownership of a company. The soundness of the share price is (or should be) linked to the soundness of the company or companies represented. Too often, especially in the modern age of complex investment analytics and strategy, it is easy to get solely focused on the technical aspects of the market, and forget the underlying bedrock that the market rests on: the value of the global economy.

Because of that, we can take heart in times of uncertainty like this. Especially in the case of the “Coronavirus Dip” the market meltdown was not caused by any unsoundness in the global economy. It was caused by fear. Fear of death, of illness, of a global pandemic. Business is still strong. Industry remains a powerful economic engine. Yes, there have been sectors of the world economy that have been badly damaged by the virus, but that is less a function of their lack of value than it is their lack of consumers at this point.

Remembering to assess the value of a company or group of companies, rather than purely analyzing the technical data of a stock quote, is the first and most important thing you can do to begin to optimize your financial situation. Optimizing your mindset is the key to the whole exercise.

2. Look for stocks or funds made up of companies whose fundamental value has only changed as a result of the pandemic

Let’s take the travel industry as an example. Obviously, nobody is taking trips these days, cruise ships are sitting idly in ports, airplanes are mothballed on tarmacs, hotels and resorts stand empty, and billions of dollars of revenue are in limbo. But, if we look at the data, we see that prior to the Coronavirus arriving on our shores, the travel industry, particularly in America, was thriving.

As an example, let’s look at Fidelity Investments’ Select Leisure Fund (symbol: FDLSX). The fund is made up of several hotel, resort and cruise companies, and represents a fairly broad swath of the industry niche. Here’s the chart for the past five years of this fund:

As we can see, up through the first part of 2020, the fund was up almost 61%. That’s amazing growth, precipitated by the explosive growth in the tourist industry in the last thirty years. Of course, the fund today is not looking so rosy, shedding almost one third of its total value between Jan 31st and March 31st. But, remember, as fractional shares in the ownership of a company, nothing about the fundamentals of the business has changed, other than the lack of customers. Once the customers return, the business returns. This would be a perfect example of a potential opportunity to get into a bargain-priced offering in the tourism niche, and add a valuable stable of corporations to your portfolio.

3. Identify any investments you currently have that were “running on hype” anyway, and which may have been exposed by the overall market weakness, and dump them.

Now is no time to get sentimental. That pet stock you had that was supposed to be a sure thing, but hasn’t quite panned out, and is now in the ninth circle of Coronavirus hell? Jettison that thing, ASAP.

If nothing else, the last few months have definitely exposed some areas of the market that were running too hot, and weren’t backed up by as much fundamental value as they were by hype and noise. As this excellent article points out, the stock market was primed for a correction for years, and while the Coronavirus seems to have pushed us well past “correction” and into a full on Bear Market, that doesn’t mean that a lot of the air that’s gone out of the market was hot air anyway.

Some of the worst offenders for being overhyped and underperforming are the tech and startup stock brackets. Much like the dot-com bubble of the mid-90s, this is less a function of shaky fundamentals, and more a function of severe overcrowding. The niche is just too crowded to support. For every Apple, Microsoft and Salesforce, there are a hundred wannabes trying to cash in. And, unfortunately, many of those wannabes are less concerned with becoming solid businesses than they are with making as much money as possible before they flame out. We can all be thankful that the Coronavirus has exposed the instability and lack of staying power of many of these overnight “unicorns” and hopefully thinned the herd somewhat of these stocks, getting us back on our feet in terms of solid fundamentals and good business models. For more on what the future of startup offerings should look like post-Corona, be sure to read this article by Alexandre Lazarow .

In conclusion, the simplest things are usually the most valuable steps to take in any investing scenario, and this is no different. The secret to setting up your portfolio to thrive during times of economic uncertainty really boils down to just these three things: Reframe your mindset and refocus on the fundamentals, look for bargains in the form of solid, sound businesses that have been unfairly targeted by the visceral emotions of fear and despair that accompany admittedly frightening times such as these we live in, and don’t be afraid to use the market downturn to do a little pruning of any investments you may have made that were unsound to begin with, since you’ll bear less of a financial loss dumping a bad stock that’s on its way into nonexistence anyway. Let the market tell you what to do, and you’ll be just fine. Trying to run contrary to the market is risky, and usually impossible to successfully accomplish, and in this situation it’s really not that much different. You can use volatility to your advantage if you remember the fundamentals of what you’re doing, and what each share of a stock actually represents.

About The Author: Jay Michaelson is a writer, new dad, and investing nerd currently teleworking from his couch, where he watches too much TV and writes about creativity, leadership, critical thinking, and business. His work has been featured in The Mission, The Startup, The Ascent, Mind Cafe and others.

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