Coronavirus
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and I just want to check in with you guys. It's been a while. It's February 24th and
00:00:07.400 | S&P 500 corrected 3.4%
00:00:11.000 | Due to fears of the corona virus the COVID - 19
00:00:16.600 | Corona virus and I feel like I'm in the twilight zone here a little bit because I still have this respiratory illness
00:00:25.720 | That has been afflicting me since early January end of December it went away for a couple weeks
00:00:31.520 | And then it came back feels like this season's flu season is much worse than expected or maybe it's simply because
00:00:38.640 | My boy's gonna preschool and he's just like the germ machine and he's bringing everything back
00:00:43.840 | So I wanted to share some thoughts on the corona virus and how we should position ourselves
00:00:48.960 | Because things could get a little bit dicey
00:00:53.760 | Definitely volatility is back and I think we need to talk about our finances and our asset allocation
00:01:00.320 | In this time of uncertainty and I think it's always good to talk about it with your loved ones with your friends with your partner
00:01:06.480 | And with yourself
00:01:07.760 | So first and foremost, I think first quarter earning results for 2020 are likely to disappoint
00:01:14.400 | Especially if the corona virus continues to spread and grow in cases
00:01:19.280 | in February and March
00:01:22.200 | Remember first quarter is January February March and they're gonna be reporting numbers in April and May and I think that chances are high that
00:01:30.200 | Companies are gonna disappoint and when you disappoint on earnings stock prices the S&P 500 goes down
00:01:37.080 | And I think there's a good chance
00:01:39.080 | The longer the corona virus lingers that CEOs of all these companies are going to use this opportunity
00:01:46.280 | I say opportunity in quotes. It's not a really great opportunity. It's not a great situation
00:01:50.720 | But this opportunity to kitchen sink their earnings. So whatever operational problems they had in the first quarter
00:01:58.720 | oftentimes or sometimes
00:02:01.920 | CEOs CFO CEOs will use some kind of exogenous variable in this case the corona virus
00:02:07.680 | To put blame on why their earnings didn't come to fruition or didn't meet guidance and this buys them
00:02:16.560 | You know another three months of time right because it's just all on quarterly earnings results
00:02:21.560 | So you just want to really pay attention to the count and the numbers supposedly as of February 24th
00:02:28.000 | there's something like
00:02:30.400 | 80,000 cases across
00:02:32.840 | 30 countries
00:02:35.440 | There's about 2700 deaths and so the numbers are probably going to continue upward
00:02:40.600 | But hopefully the trajectory will slow down. We just don't know for sure. But if it doesn't slow down
00:02:46.360 | There's probably a greater and greater chance that first quarter earnings are going to disappoint
00:02:50.960 | So if you're an equity investor like I am like I'm assuming most of you guys are
00:02:55.440 | Just be aware that things aren't looking that great to look at the bond market Wow the 30-year bond yield has
00:03:03.960 | Breached 2% it went down to around 1.85%
00:03:07.640 | That's an all-time low folks and then the 10-year bond yield has gone down to about 1.38%
00:03:14.520 | That's basically an all-time low. I mean we hit that low in 2016 about 1.35%
00:03:19.160 | But that is really interesting. It's really telling so the bond markets a bull market the stock market
00:03:26.000 | Before this three and a half percent correction was a bull market. It's still a bull market, right?
00:03:30.760 | So we're in an everything bull market. So usually when the bond market is this strong
00:03:36.280 | it means that investors are seeking the safety of bonds and usually a
00:03:42.720 | Massive ramp in bonds is a telling sign that the economy is going to be slowing down or something's in trouble, right?
00:03:50.280 | And so something has to give and we don't know for sure whether the stock market is going to give back
00:03:56.480 | All of its gains or some of its gains from 2019 or whatnot
00:04:00.560 | But it's really telling the bond market is really telling that we should be careful in the equity market
00:04:05.720 | The number one thing all of us homeowners can do is refinance our mortgage
00:04:10.840 | And I refinance my mortgage in 2019 to a 7-1 arm at 2.625%
00:04:16.240 | No points, no cost. I actually got it about a $250. Maybe it was $350 credit
00:04:21.880 | I'm set for the next seven years
00:04:24.400 | and if you haven't refinanced your mortgage in the past one year or two years definitely check and
00:04:30.280 | Definitely set yourself up and lock in a great rate because again
00:04:34.640 | We're almost at all-time lows in the 10-year bond yield and we are at all-time lows with a 30-year bond yield
00:04:39.640 | So why not lock in these low rates and at least improve your cash flow by saving on mortgage interest?
00:04:46.400 | If you've been thinking about buying property and you need to buy property whether it's because you want to settle down for the next five
00:04:53.040 | To ten plus years you need a bigger home because you have another child on the way or your first child
00:04:58.160 | Now is probably as good a time as any because the market has been softening for the past couple years
00:05:04.320 | Mortgage rates have been falling and therefore affordability has gone up
00:05:08.760 | Don't underestimate the wealth effect the stock market has given us in
00:05:13.320 | 2019 I mean a 31% increase in stocks
00:05:16.560 | I don't care what your allocation 20% 40% 80% 100% of your net worth. That is a huge move
00:05:23.660 | Historically because the stock market is historically provided about an 8 to 10 percent return. So 31% is a 3x greater
00:05:30.640 | return on average and it is just logical that people are going to feel wealthier and
00:05:37.120 | they're going to asset allocate into perhaps something more tangible and more real and
00:05:42.480 | That is the real estate market. The real estate market is relatively defensive. It's a tangible asset. So it just doesn't go poof
00:05:49.960 | The very next day out of coronavirus fears it provides utility which is shelter and then it provides income which is rental income
00:05:58.320 | So money should logically flow to real estate and away from more risky stocks in this type of environment
00:06:06.880 | Especially with interest rates going down and you can think about real estate more like a bond
00:06:11.520 | Now whether it's a corporate bond or a high-yield junk bond or a treasury bond
00:06:17.560 | It depends on what type of real estate you buy but when rates are going down real estate generally outperforms other asset classes
00:06:25.520 | so I personally believe that real estate will outperform the S&P 500 in
00:06:33.040 | 2020 just like how real estate outperformed the S&P 500 in 2018
00:06:37.360 | I also think the bond market probably has like a 70% chance of outperforming the S&P 500 in
00:06:43.560 | 2020 and the cash market. I mean, it's only
00:06:46.720 | Providing about a 1.75 percent yield. That's kind of like the best I've seen right now in the first quarter of 2020
00:06:53.200 | But 1.75 is really good folks because the 10-year bond yield is at
00:07:00.560 | 1.35 so think about it
00:07:02.680 | You've got to hold the 10-year bond yield for 10 years to get 1.35 percent a year and then all your money back after 10
00:07:09.160 | years
00:07:09.920 | but with the online savings account, you can get 1.75 percent or
00:07:13.600 | 40 basis points or 0.4 percent greater than the 10-year bond yield and you don't have to hold it for 10 years
00:07:20.800 | You can hold it for one month one year two years whatnot. So there is another arbitrage opportunity folks
00:07:27.520 | For those of you who want to build liquidity save cash get more conservative
00:07:32.880 | It's not a bad idea to really boost that percentage of your net worth and now as for the stock market
00:07:39.560 | I can only share what has happened in the past and if you look at the history of 3% plus drawdowns
00:07:46.960 | About 80% of the time you're gonna see a positive return after
00:07:52.920 | One month three months six months and 12 months and actually the percentage goes up on the 12 month mark
00:07:59.840 | In fact since about 2008 so since the financial crisis after 12 months
00:08:06.760 | Stocks are up double digits every single year since and that's just logical because it's been a bull market since 2009
00:08:15.000 | And if you want to go into the nitty-gritty about what happened during previous pandemics
00:08:21.000 | So the SARS virus I was covering Asian equities back in 2003
00:08:26.200 | So the start in global interest of SARS was March 25th
00:08:30.540 | 2003 and the peak in global interest was around April 24th. So
00:08:35.160 | about a month
00:08:37.440 | you saw China and the Hong Kong market declined by about 9% and then one month after
00:08:44.080 | peak interest
00:08:47.080 | The markets rebounded about 15% in China and 10% in Hong Kong and then three months after the peak about 31% in China
00:08:54.400 | and 17% in Hong Kong
00:08:56.400 | so
00:08:57.720 | History suggests that you should use
00:09:00.200 | These pandemic situations to leg in and buy stocks. So what am I doing?
00:09:06.280 | I actually have a lot of cash
00:09:08.280 | Because I've gotten a lot of distributions from my real estate crowdfunding investments that I made in 2016 and 2017
00:09:16.040 | So I'm legging in I said it earlier in a newsletter
00:09:19.840 | And I think in a post and my plan is to leg in with every single 2% plus
00:09:26.320 | sell down
00:09:28.800 | So on February 24th, I legged in about 30% of my cash because the market went down three and a half percent
00:09:36.640 | and
00:09:37.800 | If the market rebounds, I'm just gonna sit tight and if the market corrects another 2% or more
00:09:43.360 | I'm probably gonna leg in again and again and again and the reason why I just don't go all-in is because I clearly don't
00:09:49.600 | Know what the bottom is. We've run so far
00:09:52.920 | But also the reason why I am legging in is because I'm relatively underweight
00:09:58.000 | Equities since I bought a new primary residence in 2019
00:10:01.860 | I used a lot of my profits from 2019 to buy a
00:10:05.520 | Larger home for my growing family and I'm underweight equities by about 4% of my total net worth. So my
00:10:12.760 | equity exposure as a percentage of my net worth is about
00:10:15.340 | 21% something like that and I wanted to get it about 25%
00:10:19.920 | So I want to increase exposure
00:10:22.760 | But 25% is what I'm comfortable with and you've got to figure out what you're comfortable with
00:10:27.600 | The rest of my net worth is composed of real estate
00:10:31.240 | I think that's 35 40 percent and the bond market a lot of municipal bonds because they're double taxation free
00:10:39.400 | And also financial samurai is worth something and then also cash and private
00:10:44.680 | Investments such as real estate crowdfunding private equity investments and venture debt
00:10:49.580 | So if you're fortunate enough to have a job or a steady source of income wherever that might come from
00:10:54.320 | You should probably come up with a plan as to how you're gonna take advantage of market volatility
00:11:01.240 | Whether it's legging in every 1% 2% 3%
00:11:05.200 | Whether it's refinancing a mortgage whether it's beefing up your defensive bond portfolio
00:11:10.240 | You've got to look at your asset allocation and compare it to your financial goals and your risk tolerance
00:11:17.160 | Don't look at my risk tolerance and the way I invest and say hey, I'm gonna follow exactly what Sam does
00:11:23.100 | Because you're not me. I have two kids to provide for now. I don't have a steady job and
00:11:28.980 | I'm relatively risk averse even though it looks like I might swing for the fences for some of these things
00:11:34.760 | But on a percentage basis, I think I'm pretty relatively conservative, especially for someone my age
00:11:40.600 | I think the best case scenario we can hope for is that there is a temporary sell-off
00:11:45.940 | Maybe it's a 10% total correction
00:11:48.680 | You're able to accumulate some positions in some stocks or indices that you enjoy and then we see a v-shaped
00:11:55.440 | recovery in demand and production after the first quarter and the market looks beyond the first quarter results as a
00:12:03.520 | misogynist variable that's not
00:12:05.520 | Fundamental and long-term in nature. That's the best case scenario and I would say that's probably a
00:12:11.960 | 60 to 70 percent scenario and when you're investing you can't think about absolutes you got to think in bets
00:12:19.080 | So that is probably a 60 70 percent scenario. I think there's like a 10 to 20 percent scenario
00:12:26.200 | This could be the start of something much worse like maybe a 20% correction in which case you've got a mentally
00:12:33.120 | Exercise your mind and look at your positions and say how would you feel if you lost 20% of your position?
00:12:39.000 | Of your net worth or your investments and if you feel really really bad
00:12:43.140 | Well, maybe you might have to do some altering of your asset allocation
00:12:48.440 | But again, I want all of us to have a conversation because it's during difficult times volatile times
00:12:54.680 | But I think we can learn the most where we can also plan the most and where we can also address
00:13:00.880 | Some things we've been neglecting for a while since the bull market tends to make us a little bit
00:13:06.800 | Sanguine a little bit lazy about our investments and our finances. So thanks so much folks
00:13:14.040 | I do hope everybody stays safe and healthy and as always I'll see you around on the financial samurai forum or in the comment section
00:13:21.480 | Of a latest post. Thank you