Stock indices have plummeted in the last couple of weeks due to the coronavirus outbreak. The S&P 500 is down -8% this year. What am I planning to do about the situation?
Firstly, by the end of January, my peer lending portfolio was about twice as large as my stock portfolio. Due to the unfortunate realizations of risk, I already decided to shrink my peer lending portfolio and put more weight on stocks.
I didn't manage to really do this though when stock markets plummeted. Instead, once I realized how bad it was going to get, I further reduced my stock exposure and at the time of writing, of my total wealth only about 10% is in stocks.
Originally, the reason for having such a heavy peer lending portfolio was, because I did not believe the stock valuations to be at a sustainable level. The thinking was, that if peer lending could produce e.g. 10% long-term returns, that would be more than stocks in the long term.
Well, that wasn't exactly the right call, considering that the S&P rose 30% in 2019.
I don't disagree with my decision back then. Sure, the end result wasn't correct, but I'd make the same decision again with the same information.
The likely reason the market has responded so drastically to the coronavirus is because there are very high expectations in the high valuations. Global bad news like this mean these expectations are quickly corrected downwards.
While some industries are already impacted directly, the novel coronavirus hasn't yet had material effect on most companies' profits. The travel industry has received the worst blow with $113B predicted losses on airlines alone globally. People are cancelling their holidays and business trips. Tech conferences are being cancelled. It is unclear if the Tokyo Olympics will be held.
Italy, which at the time of writing has some 5,900 confirmed coronavirus cases, has decided to quarantine Northern Italy, with 16 million people. Japan basically shut down Hokkaido. The CDC is encouraging elderly people to "stay at home as much as possible".
The drastic measures are an attempt to contain the virus, which it most certainly will not be. As the virus continues to spread, we'll see more and more travel restrictions and quarantines. And these will keep on coming - just have a look at the daily total cases outside of China:
It's not slowing down and will not be contained. It's too late for that. Have you played the Plague Inc? I know I'm comparing real life to a game, but it's a good reference point (and a great game, free too!). Epidemics grow exponentially - starting slow, and speeding up the wider they spread. And "this beast is moving very fast" - a headline from a month ago.
There are at the moment already 9 countries that get over 100 new cases per day. As the SARS-CoV-2 eventually is acknowledged a pandemic, it'll give the media more to write about. I imagine the stock markets will react to this again. But that's not the worst part.
The worst part is the strain on unprepared healthcare systems. Since the virus spreads so quickly, it is possible that densely populated areas could run out of hospital beds. This means people who need hospitalization and respiratory assistance won't get it. The result will be a higher death rate.
Then there are the tertiary problems that result from a slowed-down society even on the other side of the globe. China is estimated to produce 20%-40% of the world's active pharmaceutical ingredients, which the modern world relies on in drugs. If China cannot contain the virus, the rest of the world might end up suffering from shortage of drugs.
And it's not clear yet how quickly the virus might mutate to infect people who have already suffered the disease once.
Most people will be ok. The economy will be ok. But the fear SARS-CoV-2 causes will, in my opinion, likely produce some great opportunities to buy stocks.
My plan
The original reason for having such a heavy peer lending portfolio was to get decent returns while waiting for the stock market to become more affordable. A 10% correction such as we have seen is a good start. With a Shiller PE of 28 however, we're hardly at affordable levels, so I don't feel high urgency to stocks just yet.
Option 1: stick to peer lending and ride it out
One good option would be to continue having a heavy peer lending portfolio. I don't have any reason to believe that consumer lending would suffer very quickly, without a recession. So, one could stick to short-term consumer loans until the potential recession hits, then make the move to stocks. Some alternatives for executing this plan would be Mintos, RoboCash, Viventor, Swaper and PeerBerry.
Option 2: try to bottom-fish
If you could just accumulate cash and buy at the bottom, you could potentially make a lot of money. There are downsides to this though:
- What if it takes months to reach the bottom, wouldn't it be better to stay invested in lending instruments?
- What if you miss the bottom? You'll lose on a lot of potential.
It's quite difficult to predict the bottom, even as it is happening, so bottom-fishing probably isn't a great strategy.
Option 3: sell equities short
This is the most aggressive, most risky move. If I'm so convinced the markets will fall, why not sell them short? You got me. I'm not THAT convinced.
The risk of selling short is theoretically unlimited. What if the markets bounce back up? By not being invested, I'm limiting that risk. I won't benefit from the bounce, but I won't be down either.
Option 4: buy precious metals
Gold is a traditional safe haven in volatile times. But the shiny metal has climbed already during last year a lot and even when the outbreak is getting worse, gold isn't climbing. I believe investors aren't buying gold, since they don't need to protect themselves from inflation: the virus should be done soon, right?
Option 5: dollar-cost average to stocks
The third option is a compromise of the two firsts. Rather than trying to predict the bottom, gradually shift to stocks with dollar cost averaging.
The beauty of this strategy is that you're invested all the time. Unfortunately, I started to look into stocks already before it became clear the coronavirus won't be contained. I've already divested some of my peer lending portfolio.
This is still likely what I will be doing: dollar-cost averaging gradually towards stocks when there are buying opportunities. Experts say the epidemic could peak already during April. Once the peak is passed, it should bring a lot of optimism back to stock markets, so completing the buying by then, over the next seven weeks, could make sense.
I think that's what I'm going to do.
Risks
I'm currently sitting on a bit of cash. That's always risky: I'm too much out of the market. Everyone knows you can't time the market. So what the hell am I doing? Well, to be honest, I'd rather be more invested in liquid peer lending than what I am currently, while I dollar-cost average.
Honestly, I had a discussion recently with my bank and they were already asking questions about my money movements. I might be losing a few hundred euros in the next couple of months by not being in the market, but I'd rather they don't freeze my account for suspicious activity at a time like this.
It's not ideal, and I definitely would not choose it this way, but in the current situation I think it's what I'm going to do. Time will tell how this will work out.
Final words
I've now talked a bit more about stocks than what I have used to in the past. This doesn't mean I'm turning away from peer lending completely. I'm just taking advantage of the situation in the stock market. I will likely still have a way too large peer lending portfolio for most people's taste, don't worry.
And once the recession (I'm already calling it a recession - it's not certain, but I believe we'll see it already in 2020) is over and stocks get overvalued again, I'll likely swing the other way. By then we'll also have seen how peer lending works in an economic downturn.
How are you reacting to stock market changes?
