My Coronavirus Investment Strategy

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How to invest during Coronavirus

My Coronavirus (Covid-19) Investing Strategy For Peer to Peer Lending and the Stock Market

** Updated March 26th, 2020 **

Coronamania is upon us. The stock market is experiencing some bipolar activity with severe up and down swings unseen since the days of the 1987 USA stock market crash.

I’m sure you’re wondering what to do with your investments. Should you sell your stocks? Are your peer to peer investments safe? How this crisis will affect investments in the sort and long term?

Here are my opinions on economic outlooks, peer to peer lending and stock market strategies during these uncertain times.

It’s important to remember that, this too shall pass.

Economic Outlook

If the virus lingers, I’m concerned about SME’s (small and medium-sized businesses). Businesses such as restaurants, hotels, travel, services, and retail will inevitably suffer. The governments are offering these businesses loans, but if and how will these loans be repaid?

Businesses temporarily closing leading to employee layoffs will have a run-on effect that will affect peoples’ ability to make mortgage payments which will affect the property and rental market. When people aren’t working, they stop spending and this creates a ripple effect.

The good news is that world economies simply can’t survive by closing down indefinitely and governments know this. Governments will have to quickly find a balance between shutdowns and maintaining economic health. This will be achieved with large stimulus packages such as the US Fed purchasing corporate bond ETF’s to pump money and liquidity into the markets for people who want to sell their ETF’s. Eventually, there will need to be a loosening of the lockdowns and quarantining.

Once the Cornavirus concern subsides and the virus is contained, I believe world economies will thrive as stimulus packages will have pumped trillions into world economies.

Peer to Peer Lending Strategy

I believe the peer to peer lending sector is one that will continue to innovate and thrive, simply because this form of lending solves two problems in one solution. Peer to peer lending gives investors returns that are better than bank savings rates and provides fast financing to businesses. The biggest question surrounding peer to peer lending continues to be which companies are reputable and which can survive long-term. The Coronavirus crisis might provide up these answers.

I’m still holding my peer to peer lending investments while rebalancing into the companies I view as having long-term sustainability. This isn’t always easy to estimate as I don’t have access to peer to peer companies current financial balance sheets.

Peer to peer lending does have some advantages during economic downturns. Peer to lending can:

  • pay returns that are higher than bank savings rates
  • offer businesses financing that they would be unable to obtain from banks
  • offer more capital protection than the volatile stock markets

During this time of uncertainty, I’ve been continuing to withdraw any interest and capital repayments and have in some cases, reducing my investments where possible. But this for me is a short-term move as I don’t see anything wrong with sitting on the peer to peer sidelines for now. There’s no need to take unnecessary risks.

My Top 5 Peer to Peer lending list has changed, so please check it regularly as markets change.

If I were able to rebalance and were free to move my investments today, I’d be investing through well-funded peer to peer companies that have strong business fundamentals and the ability to ride out this possible financial storm. Some peer to peer lending companies have low expenses with small teams (Loanpad) or are funded by larger operations (Octopus Choice and Lendinvest). Octopus has healthcare and energy businesses that may thrive during difficult economic times.

Another peer to peer company that may benefit from tougher economic times is Unbolted which loans money against easily recoverable items such as gold and jewelry. When times are tough, people pawn valuables to access money quickly.

If this virus is long-term, property-backed peer to peer loan companies may experience increased borrower late payments and defaults. If homes cease to sell, then developers will be sitting on inventory for longer than usual which can increase economic strain. The peer to peer companies that are loaning at conservative loan-to-values would be a safer bet. Property backed peer to peer companies such as Blend Network, Property Crowd, Proplend, and Crowd Property have emphasised the importance of risk assessment and risk reduction when looking at deals.

I’m hopeful that the larger peer to peer lending companies such as Ratesetter and Assetz Capital have underwritten quality loans that will remain current. The issue is if the virus lingers for a period of months, some consumers and everything from small to huge companies might not be able to make debt payments. This is why we need the virus to pass quickly.

Don’t be alarmed to see peer to peer companies freezing or slowing exit withdrawal requests. Exit liquidity requires not only sellers but buyers. When everyone is attempting to withdraw from their peer to peer lending investments at once, naturally there won’t be enough buyers, hence the lack of exit liquidity. I expected this to happen during any financial crisis.

While we have no information about companies’ financial health, these freezes don’t necessarily mean the peer to peer companies are in financial trouble.

Remember peer to peer companies never guarantee investors a way to exit.

Peer to peer lending has its own risks that differ from the stock market so be sure to understand these risks.

The Stock Market

“Someone’s sitting in the shade today because someone planted a tree a long time ago”.

– Warren Buffet

I recently received an email from a reader who was upset their index tracker had fallen in value. The reader called me some choice words for suggesting they buy index trackers. I’m not surprised by this reaction. Anyone uninformed who is investing in index trackers not thinking long-term might have a similar reaction.

I’m sure you are wondering what to do with your investments? Let me try to be a calming voice in a time of uncertainty. I’ve always purchased index tracker funds with a very long term outlook (15 year+) and I’ve purchased more index trackers as the markets fell. I have cash sitting in an account ready to buy more.

I buy index trackers rather than ETF’s because ETF’s are traded on markets like stocks and their valuations can differ to the index tracker funds which have identical holdings. ETF valuations are complicated and come from a mix of company data, IIV (intraday indicative value), NAV (net asset value), premiums and discounts, cash and estimated cash, demand and supply, and third-party valuations. Sometimes the companies that offer the ETF’s have a difficult time valuing the ETF’s int he short-term.

Index trackers are valued once per day and execution times are longer for transactions. I actually like this feature because I’m less likely to try market timing when I know I can’t move in and out of index funds like I can a an ETF or a stock.

While I have no crystal ball for the future, everything is temporary. Let’s look at some of the historical stock market swings that we have survived and thrived through.

Dow Jones

1932: Year close: 59.93
1937: Year close: 120.85
1987: Year close: 1,938
1991: Year close: 3168
2002: Year close: 8,341
2005: Year close: 10,717
2008: Year close 8,776
2011: Year close: 12,217
2019: Year close: 28,538

As you can see, every major financial crisis has been temporary and the Dow Jones has rebounded. I estimate a recovery after the Corona Virus crisis to be no different.

When the markets fall based on fear, buying opportunities are everywhere. In fact, this stock market fall may present a once in a decade opportunity. When people are selling, I’m buying. People who panic sell stocks are making emotional decisions. Smart investment decisions are made logically.

While I dislike the impact financial crises have on people, I love it when stock markets correct because when prices fall, it means tracker shares are cheaper and when markets rebound, they should be more valuable long-term.

I’m still buying my favourite Vanguard US Equity Index Tracker (VTSAX is the USA version). I use Vanguard’s Global Bond Index Fund for less volatility and as a hedge for stock market corrections. You can read more about why I buy these two funds here.

There are some naysayers of bond index trackers but between February 24th, 2020 and March 24th, 2020, my favourite Vanguard equity index tracker dropped -20.8% from £540.44p to £427.59p (chart here), while my favorite Vanguard bond index tracker only dropped -3.06% from £161.85 to £156.89 (chart here). In many cases when equities are suffering, bond index funds can remain level or even appreciate in value, depending on interest rates.

For those wondering if managed robo investment tools are better performers during stock market corrections, I have a test Wealthsimple account. This account has lost -22% during February 24th, 2020 and March 24th, 2020. So no, robo investment tools aren’t better than index tracker funds. My account balance is very small (less than £500), if it were higher, my account would have lost more money due to the fees.

Index trackers are long-term investments. If you buy index trackers for short-term purposes (less than five years), you are gambling. If you bought trackers in February 2020 and are panicking because you have seen their values fall, stop panicking and stop checking your account. I believe the prices will rebound as they always historically have.

If you are trying to time the stock market to buy in at a low point, you won’t succeed through anything other than blind luck because no one knows where the bottom lies.

So why not buy individual shares? Many amateur investors are trying their hand at stock picking during the Covid-19 crisis. You could, for example, go all-in on a company that manufactures ventilators. It sounds like a good idea until you consider what happens when the virus passes and the company has a massive overstock of ventilators it can’t sell. Plus oftentimes, share price already has such factors priced in.

I don’t purchase individual stocks because if those stocks fall 30%, it’s hard not to want to sell them based on the “what if they fall further” mentality.

For example, as of March 2020, if you purchased International Consolidated Airlines Group (IAG:LN), which contains companies such as British Airways, the share price is down almost 70%.

The last individual stock I bought years ago was Apple with a buy and never sell strategy. For me buying individual stocks is too risky. Index trackers buy the entire broad market and can be used as a long-term wealth-building strategy.

Remember, you only lose money in the stock market when you sell.

In Conclusion – Stay the Course

This phase has been an important reminder for me during my investing journey. I have to remember that everything is temporary and that these tough economic times will pass. Nearly every time I’ve tried to market time my investments, I’ve gotten the timing wrong. I tend to sell when the prices are falling and buy when the prices are rising, never knowing where these tops and bottoms are. So now I just stay the course.

For peer to peer lending, I have no power to see the future, but I believe the industry is here to stay. My hope is that this financial crisis will weed out the bad peer to peer lending companies and allow the quality companies to thrive. Building customer confidence will be essential for the strong peer to peer companies future. Surviving this economic downturn should be a great way for these companies to build this trust and confidence with investors.

As far as the stock market goes, corrections are good for long term investors, especially if you have extra money to invest. When prices fall, you can buy more index funds for less and when the markets rebound which they always have, you’ll be very happy.

I wish everyone good health and remember, this too shall pass.

– Laurence

 

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