How to Invest in the COVID-19 Era Without Taking Too Much Risk

As I write this the US stock market is down something like 28% so far this year. The worst calendar year loss for stocks was in 1931 – down 44%. Then down 35% in 1937. And 37% in 2008.

Beyond the Great Depression and the Great Financial Crisis, this is about as bad as it gets as far as single year performance.

Which makes the Coronavirus crisis look like a great buying opportunity, right?

Not necessarily.

You Need Money to Live

Not only is COVID-19 a threat to our health, it’s caused the economy to nearly shut down. It’s almost certainly going to cause a recession.

So even if you have money to buy stocks now, what if you need it in three to six months, because you’ve been laid off?

Financial advisors often say you should have three to six month in living expenses in an emergency savings account. That’s very quaint, but the last time I was laid off it lasted for five months – and the economy was doing great at the time. Cutting it kind of close don’t you think?

This is sort of why I keep as much as 65% of my taxable account in either bonds or products that hedge stocks. My 401k, meanwhile, is 100% in stocks and I plan to keep contributing as long as I don’t need the money.

Read more about my overall strategy

My taxable account strategy may seem conservative and it seemed downright wrong for like the last 10 years. But I think understanding your own risk tolerance is one of the most important parts of investing.

The market just fell 30% from its highs – did you puke?

If you did or even if you felt like it, that tells you something.

My point is, even if we assume this is a great buying opportunity, I wouldn’t dive headlong into this without really thinking about how much you’re willing and able to risk.

History tells us the market could keep falling. You need to be prepared for that and also consider what might happen to your livelihood before this is over.

At some point, though, we’ll have to think about the future. We will want to retire. I think investing is the best way to do that and this is an opportunity – it may not be the best opportunity, but it is certainly not the worst. Even a small amount now could go a long way, compounding for years to come.

My Two Favorite Ways to Hedge the Stock Market

You don’t have to go all in. There are some great products that allow you to hedge the stock market. You can capture a good portion of the upside without exposing yourself to the full downside.

Now, you have to accept that when stocks go up big, you’ll lag behind. I can live with that. I don’t have to “beat the market.” I’m happy making money without risking my shirt.

There’s two ways I do this.First, the old fashioned way. Let’s say you have $1,000 to invest and you have a very moderate risk tolerance (like me).

  • Take half of it and put it in a plain vanilla index fund (ETFs like VTI, VOO, VT or SCHB).

  • Take the other half and split it three ways between long-term US treasuries, gold and the Japanese Yen (ETFs TLT, IAU and FXY).

If you had used this tactic in 2020 so far, you’d be down about 11%. Not great, but much better than 28% for US stocks! Historically, US treasuries, gold and Japanese Yen have been the best safe havens.

Second, you can go long/short with my favorite ETF hedge. This time you take that $1,000 and:

  • Put half in your vanilla index fund of choice.
  • And the other half in the AFGiQ US Market Neutral Anti-Beta Fund (ETF symbol is BTAL). This fund basically goes half long the least risky stocks and half short the most risky stocks. And usually, the most risky stocks go down a lot more than the least risky stocks.

If you had used this tactic in 2020 so far, you would be down only 5.5%!

I wish I could say I have an absolute iron stomach or a constant flow of money to pump into the stock market with complete confidence, but I just don’t. And I don’t have a clue what will happen in the short term. But this is how I’m approaching investing in the COVID-19 era, for better or worse.