It's incredible how much can change over the course of just a few weeks. Just five short weeks ago, the US economic landscape was looking rather peachy by most metrics. In fact, the February jobs report was the strongest in over a year, with solid job gains and unemployment at an all time low. The markets were unstoppable as they reached all time highs, and even the trade war was showing signs of improvement.
Then all hell broke loose. The coronavirus pandemic spread worldwide, causing a Black Swan Event that crippled economies across the globe.
First the markets crashed, falling 30% in a matter of weeks. Then the economy all but shut down as cities and states enacted shelter in place measures to slow the viruses spread. And now tens of millions are losing their jobs as we struggle to make sense of it all.
Undoubtedly, we're experiencing the greatest economic event since the great depression, perhaps ever. Some experts project that unemployment could reach as much as thirty percent!
As we begin to accept our new reality, and brace for impact with the inevitable blows the recession will bring, it's important to take a moment and strategize so we may improvise, adapt, and overcome what lies ahead.
Here are five tips to PROFIT from the downturn:
Go Back to Go Forward
Before trying to look at what lies ahead, take a moment to look back at how you (and your portfolio) got here. How was your portfolio performing leading up to the crash? How is it performing now?
Determine what's been working and what hasn't. Where are you vulnerable and where are you strong? If an asset class or strategy wasn't performing leading up to the crash, it probably won't perform now. It might be best to cut your losses and try something else.
Now’s a good time to trim the fat and focus on the top performers. That's not to say you should abandon the principle of diversification, but rather determine if your portfolio could benefit from a rebalancing.
As we progress through the downturn, continue to monitor your portfolio's performance on a regular basis. You'll come away with some valuable lessons learned to help your future self better prepare for the next downturn.
Build Your War Chest
In the very near term, a focus on capital preservation is paramount. Hit the pause button on expansion for now and focus on defense. If you own investment property, you might hold off on any renovations you had planned and prepare for a rise in delinquencies. Planning on finally getting that new Tesla? You might want to hold off on that for now.
Take the time to cut out any unnecessary expenses and start hoarding cash. The more cash you have on hand, the better positioned you'll be to take advantage of opportunities that will arise.
CASH IS KING!
Also, look into any and all relief programs you may qualify for. If you lose your job or your tenants stop paying rent, don't dry up your reserves when you could take advantage of forbearance or deferment opportunities. That way you'll be in a better position to capitalize on high potential prospects as they arise.
Invest in Relationships
When the going gets tough, the tough get going! Ok ok, it's a little cheesy, but that doesn't mean it isn't true. Now's a great time to take stock of the people in your network. How are they responding to our new economic reality? Are they still in denial, continuing on as if it's business as usual? That might not be someone you want to invest with or partner with on a future project.
How prepared are they? Suppose you employ a property manager for an investment property, had they been maximizing your properties' performance prior to the crash? Or are they scrambling to find ways to streamline operations to keep things afloat. I don't know about you, but I prefer to work with, and hire people, that are pro-active not re-active.
We invest a lot of time in the relationships we cultivate, so make sure you're getting a good return on your investments by fostering the right relationships.
Consider Cutting Your Losses
There's an old saying; Don't throw good money after bad. Otherwise known as the sunk-cost fallacy, it refers to the tendency for people to continue an unsuccessful endeavor because they're emotionally invested in the time, money or other resource they've already put in it.
As an example, imagine you're under contract to purchase a property you intend to flip. However, a lot has changed since you made the offer a few weeks ago. The risk of a decline in home prices is high, so it's probably not wise to proceed.
The right move is most likely to walk away, but a buyer succumbing to the sunk-cost fallacy would proceed because they've already paid for inspections, appraisals, and might not be able to get their earnest money back. Those are sunk costs they can't get back, but they can avoid greater losses by pulling out of the deal entirely.
Be Greedy
Lately I've seen a lot of people parrot the famous quote by Warren Buffet, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." As the economy continues to spiral into chaos, it's important to see it for what it is: an opportunity.
Like every downturn, fortunes will be made in the near future by savvy investors capitalizing on market dips. Whether it's the stock market or the real estate markets, numerous assets will be available at a discount for those investing for the long term.
Nobody wishes they bought less property in the 2008 recession, and five years from now we'll be saying the same about The Black Swan event of 2020.
We just entered a deep dark tunnel, and although we can't see it yet, there's light at the end of it. Opportunity is on the horizon for those wise enough to seek it.
Final Thoughts
Although many of us (myself included!) have lost money in recent weeks, I truly believe we can come out of the downturn stronger than we went in. As I said, fortunes will be made by those ready to take advantage of opportunities that arise.
I think Nathan Rothschild, the famous 18th century banker who made a fortune in the aftermath of The Battle of Waterloo, said it best: "The time to buy is when there's blood in the streets, even if the blood is your own."