For many of us, the coronavirus market crash is the first big test of our investment careers. Many Canadian investors now know a great deal about the events that led to the Financial Crisis of 2007-08 and the Great Recession. But few of us knew what it was like to be invested in the heat of the moment when there was blood on Wall and Bay Street.
As it turned out, the crash if 2007-08 ended up being one of the best buying opportunities of all time. But amid the landslide, nobody knew stocks would post a U-shaped recovery and not a depressing L-shaped one, like the one suffered after the Great Crash of 1929.
The luxury of a sharp V-shaped rebound was no guarantee in 2008, and there’s no guarantee it’ll happen for the coronavirus market crash. And that’s what makes buying or even hanging onto stocks a chore for the average investor during times of market turmoil.
Nobody knows if the coronavirus market crash will be worse than the 2007-08 Financial Crisis, but for long-term investors, it shouldn’t matter
It’s a given that the coronavirus crisis is going to propel us into a global recession. The stock market is already priced for such, though. The only question is whether the recession is going to be milder, more severe, or comparable to the one suffered during the Financial Crisis.
Only time will tell how bad things will get, but if you’re a long-term investor with a time horizon beyond five years, you shouldn’t pay too much merit to what you think the markets are going to do next, because you’ll most likely be completely wrong.
As a long-term investor, you can afford to wait for anything slower than a U-shaped rebound. As such, you should continue to nibble away at the bargains that Mr. Market is throwing your way instead of trying to time the bottom or forecast the sharpness of a market rebound.
Sure, an L-shaped rebound is less than desirable, so investors should ensure they’re adequately compensated with a safe and bountiful dividend while they wait for a recovery.
Coronavirus market crash: Things could get uglier, so don’t spend all it all at once!
With Dr. Anthony Fauci warning that the coronavirus (COVID-19) could lead to millions of infections (and around 200,000 deaths) in the U.S. alone, things could go from bad the worse over the coming months. As such, investors should ensure they’ve got enough dry powder to nibble away on the route back to 52-week lows and below.
Do be a buyer of stocks that allow you to pay three quarters for a dollar, but do realize that an opportunity to pay two quarters (or less) for a dollar could present itself over the next year.
At this juncture, there’s a risk that you could pay three quarters for something that’d only cost you two quarters in a week. But at the same time, there’s also a risk that you’ll have to pay full price (or even a premium) for a stock in the event of a V-shaped rebound brought forth by either a flattened infection curve or as promising treatments for COVID-19 come to be.
The way I see it, long-term investors need to balance the risk of missing out on a sharp rebound and the risk of accumulating further losses amid these absurdly volatile times. There’s no guarantee of a 2008-style rebound, but for long-term investors, that shouldn’t matter.
The deals are here today, and there’s no guarantee that they’ll be here in a year, month, or even a week from now.
So, if you’ve got ample dry powder on the sidelines, it makes sense to start putting it to work in a controlled, systematic fashion rather than trying to put it all to work when you think the coronavirus market crash bottom will be in. The bottom could come and go so quickly that the golden opportunity to buy stocks could come and go without a moment’s notice.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any stocks mentioned.