Financially Speaking | Fall 2020
Investing During COVID-19: Stick to Your Principles
It’s easy to panic in the midst of a pandemic, but investors must avoid portfolio mistakes that’ll plague them when the economy recovers.
Mark J. Gilbert, CPA/PFS, MBA
President, Reason Financial Advisors
The COVID-19 pandemic has affected so much of our daily lives including, of course, our
professional lives. For me as a CPA and financial advisor, this means more than working
from home. It means watching interest rates drop and stock values gyrate as the U.S. and
global economies continue to struggle. In times like these, it’s good to ask, “When the world
changes, should our investing principles change as well?”
The Old Standard
I think CPAs—regardless of whether we offer financial planning services to clients—have a
pretty good understanding of the basics of investing:
- Develop an emergency fund and save or invest it in a safe, liquid vehicle.
- Invest according to the timing of goals: cash and bonds for short-term goals,
equities for long-term goals.
- Remember that the expected return of an investment increases with the expected
risk of that investment: equities are expected to return more than bonds, and both
are expected to return more than cash.
- Reduce equities and increase bonds and cash as you age.
- Hold an appropriate amount of equities, bonds, and cash consistent with your
- Diversify to reduce investment risk.
- Don’t rely too heavily on Social Security to provide retirement income.
These basic principles have kept investors grounded and focused on their financial and
lifestyle goals for decades, preventing them from getting caught up in the euphoria of bull
markets or the despair of bear markets. And, even in this financially challenging time, I think
you and your clients will find the old standard still works.
The New Normal
Investing now is like investing during any economic recession, during a national crisis, or in
a time of serious political turmoil. In other words, the lion’s share of a portfolio should remain
the same, and you should make small changes in response to the current environment.
Along those lines, remember that your time frame for using your assets should strongly
influence the changes you make. If you are retiring, paying for college, or making a down
payment on a house soon, then your time frame is relatively short and the pandemic’s
negative impact might have a major effect on your portfolio. On the other hand, if you don’t
expect to make withdrawals for years, the immediate effect of the pandemic on your
portfolio—while certainly not pretty—is not as meaningful (and could be an opportunity). So, what kinds of small changes will help your portfolio weather the
Historically low interest rates are pushing more investors into
equities, resulting in higher price-to-earnings multiples when valuing
stocks. While higher share prices are justified (to a degree), it’s
important to remember the earnings component of any stock must
also be rising in order to support higher share valuations. The best
stocks to hold for the foreseeable future might be those of
companies that provide products and services most needed during
the pandemic—think PPE manufacturers, pharmaceutical companies
developing a COVID-19 vaccine, home delivery services, streaming
services, and videoconferencing providers. Conversely, many
companies that provide in-person experiences—like travel services,
cruise lines, theater operators, and restaurants—are posting little to
no earnings, and even losses, as the pandemic stretches on.
The pandemic is taking its toll on sector investing as well. Generally
speaking, technology and consumer staples are faring better than
the stock market as a whole. Because of low interest rates,
the financial sector will likely underperform the overall market.
Energy and commercial real estate are also likely to underperform
due to reduced demand for oil and gas and rising office and retail
Rebalancing your portfolio to capitalize on these outlooks seems
logical, but remember that market prices are based on future
expectations to a great degree. If a stock’s price has already
been beaten down, it may be primed for a recovery on merely an
incremental improvement in the company’s earnings outlook. In
fact, it could be a smart move to invest in out-of-favor stocks and
wait for prices to climb as earnings forecasts begin to rise. In any
event, it’s prudent to diversify by investing in all sectors of the U.S.
economy, and simply increasing or decreasing your holdings in
Fixed Income Investing
Low interest rates are a challenge for bond investors. Income
investors must accept lower coupon payments on new bond issues
and pay more to acquire bonds with relatively high interest payouts.
Total return investors, who hold bonds to reduce risk in their
portfolios, will enjoy the rising prices of bonds in this environment,
but they face reinvestment risk when the bonds mature and need
to be replaced with new, lower-yielding issues. Though this is
unfortunate, I don’t recommend taking any action to counter these
effects. The best ways to improve yields in the face of lower interest
rates—substituting bonds for higher yielding dividend stocks or
investing in longer maturing or lower credit quality bonds—all
require taking on more risk. In effect, investors need to bear the
consequences of lower rates in the bond portion of their portfolios.
However, there is another aspect to fixed income investing during
the pandemic that investors should pay attention to. Many observers
suspect the $8 trillion stimulus (as of this writing) that the federal
government and Federal Reserve have added to the economy is
likely to be inflationary once the economy begins to rebound and
the pandemic recession recedes. If this is true, then investing in
inflation-indexed Treasury bonds could be attractive as their
principal value is adjusted upward consistent with the inflation rate.
The bottom line is COVID-19 has spurred spikes up and down in
U.S. and global stock markets throughout 2020. If you don’t want
to get whiplash, I suggest sticking to the tried-and-true investment
principles above while making small changes to realign your
portfolio with our current reality.