With the stock market and global economy in a state of flux, I’ve been getting some questions about investing and coronavirus. People are asking about the possibility of a recession, what that might mean, and if they should keep investing or put things on hold.
Coronavirus is a very serious concern. It’s likely going to be around for a while, and it will result in tragedy. I don’t take this for granted.
Assessing the situation from a rational perspective and asking “what does this mean for my family and me,” however, is a great place to start when making decisions for the long term.
Coronavirus and the Spanish flu
It’s doubtful that coronavirus will be as bad as the worst outbreak we had 100 years ago with the Spanish flu. I’ve been researching and reading about widespread illnesses because, historically, it’s an interesting comparison.
The Spanish flu happened around the end of World War I. The widespread effects around the world led to what’s called the cytokine storm.
A cytokine storm is when your body drops the “nuclear bomb” of immune defense mechanisms. The problem is that in the case of the Spanish flu, this reaction would kill people. Because young people’s bodies do a better job of immune defense than older people, the younger population, including children and physically healthy adults, were the primary victims of the Spanish flu.
The damage was off the charts. For example, pregnant women had a 30% to 70% mortality rate. Over 100 million people died worldwide.
The Spanish flu was devastating. I’m not saying coronavirus isn’t. I’m just suggesting that you keep it in perspective.
The Spanish flu, the stock market and recovery
During the Spanish flu, the stock market fell around 15%. But in the next five years after the virus ended or became less of a concern, the stock market went back up. During those five years, it doubled in value.
Here’s something interesting. Everyone assumes that the Spanish flu was this one event that happened, and then people didn’t have to deal with it anymore. But that’s not the case at all.
I was researching a link from the Philadelphia Inquirer and looking at deaths per 100 thousand from flu over the years. During the flu pandemic in 1918, the rate was 612 per 100,000, which is a death rate of about 0.6% in a single year from the flu.
If you look five years later, around the 1920s time frame and after the stock market had recovered, there were still a couple of hundred people per 100,000 dying of influenza illnesses.
Flu was still extremely deadly well after the Spanish flu pandemic. But life moved on, and people kept doing the normal things they would usually do.
What’s really killing the market
Even though this deadly Spanish flu virus mutation was transmitted everywhere, and 100 million people died, the market’s reaction wasn’t more than a shrug. Fifteen percent isn’t that much compared to what happened with the Great Depression and World Wars in terms of market decline.
Human suffering, on the other hand, was on a scale so vast that Spanish flu makes coronavirus seem mild.
Why the big market fluctuation with coronavirus?
Stocks last week had their worst day since 2008. It’s the fears of a global economic recession that’s killing markets. With how interconnected the global economy is now, people are terrified of what’s going to happen with this coronavirus and its impact on business and consumer behavior.
But remember what I said earlier about having perspective? Is coronavirus going to kill everybody? Probably not. And that’s based on how bad the Spanish flu was and that America is so much more prosperous now than it was back in the early 1900s.
The development of a vaccine for COVID-19, the disease caused by this coronavirus, and clinical trials will still take time. Fortunately, with today’s science, people are more protected from these kinds of outbreaks than people were hundreds or even a thousand years ago with the Black Plague.
How to protect your investments during the coronavirus pandemic
Eventually, the market will recover. Your stocks will regain value, and your portfolios will be just as good, if not better, than they were before the pandemic-related stock market drops.
That perspective doesn’t change the fact that the markets are falling fast right now, though. If you’re concerned about losing lots of money, here’s what you can do.
Now is a great time for tax loss harvesting. You take something that is a mutual fund in a taxable brokerage account that’s very similar but not identical and then trade those two mutual funds for each other. Hold onto it for 30 days, then lock in a loss on paper that you can use to offset your taxes.
Keep in mind you can’t tax loss harvest a retirement account.
But let’s say you invested $10,000 in a brokerage account. With market changes, it falls from $10,000 to $7,000, which is a $3,000 loss.
Let’s also say you own the VTSAX total stock market index fund. You could sell that and have a $3,000 loss. But if the market turns around and that stock goes way up in value, you just lost a bunch of money.
The loophole is something called VFIAX, which is the S&P 500 index fund at Vanguard. The two funds track each other with an almost 100% correlation. If you exchange the $7,000 VTSAX mutual fund for the S&P 500 index fund, you can lock in that $3,000 loss without actually losing money.
You have to hold onto that fund for 30 days. Eventually, that mutual fund will recover, and you’ll participate in that recovery. Then that $3,000 is used to offset $3,000 of active income that you might have earned that year.
Tax loss harvesting is an effective strategy if you’re in a high income bracket because it can save you 20% to 40% on your taxes.
Should you be investing right now?
The markets are low right now, which means you could get a stock that’s usually very expensive for a discounted price. But investing because the market is low is not a good enough reason.
You need a long-term plan that includes an investing strategy based on your goals.
For instance, if you’re at risk of losing your job in an economic recession, you shouldn’t be investing a ton of extra money right now. Instead, stash your cash until you have enough to survive a year or two.
But if you’re in healthcare, let’s say you work as a physician at the VA, you can probably get by with three months’ expenses because it’s unlikely you’ll lose your job under any circumstances.
So, should you be investing right now? If you have enough cash that you can afford to put money away and not need it, then yes. I suggest you gauge how likely you are to lose your job, make sure you have an emergency fund, and then invest a portion of whatever is left after that.