Oh no, not the black swan pattern!

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The western world once thought that all swans were white, because up to that point they’d only ever seen white swans. Then a Dutchman called Willem de Vlamingh took a boat to Australia and while trying unsuccessfully to catch an Aussie, discovered a black swan instead, and changed zoology profoundly forever.

In the economic world we use the term for something completely unexpected, that has an extraordinarily large impact, and is usually followed by people saying “Why the hell couldn’t we see this coming, it was so obvious!”. Of course there are now many people who claim to have seen it coming, but I’d ask them for screenshots showing the fortune they made by selling everything just before the crash. Don’t expect it anytime soon.

As for the rest of us with brokerage accounts that look like they have recurring dreams of Freddy Kruger, what the hell should we be doing now?

Well first, let’s get the most important bit out of the way. You need to follow the social distancing guidelines. Initially I was going to show you how incredibly dangerous this virus is myself by showing you how quickly it compounds, but you likely already know that. Instead I’ll leave one picture, one video and one link.

This is why you should stay home in one picture:

Makes sense doesn’t it? Next you need to watch this video on how exactly COVID-19 works and what we should all do:

Now I’m sure you’ve learnt something, but as promised there’s one more link. Here in horrifying detail is just how the Coronavirus will make you or someone you love very, very dead. Be warned it’s frightening. After reading it I immediately changed my planned measures for moving around during this pandemic: Click here.

So please stay home, especially if you have symptoms. There are reports from people who know they’re positive still going out. When you consider that on average every person infects 2.2 other people (this is called the R0 number), then those infect 2.2 more people. At that rate it only takes 10 steps to have 2655 people infected, 20 hops and you’re at 7 million, and of those odds are more than 140 000 will die. It’s like compound interest on steroids, only with mass fatalities instead of bucket loads of money.

And since we’re on the topic of money…

My F*k Marelize

It’s been a bit wild out there. At the worst point (so far!?!) I was down more than 20 years living worth of expenses. TWENTY!!!

But you know what? I’m not actually bothered by that in the slightest. In fact if it didn’t come bundled with large amounts of death I’d probably be happy about it, because I know the only time I should worry is when either of my answers to the questions below is no:

And for the last 6 years, my answer to both questions was yes, thank goodness. Sadly, if you own individual stocks or ETFs which only hold South African shares you’ve made a mistake. By investing in only 0.74% of the world you’ve taken on far too much risk unnecessarily and it’s worked against you.

But if you’ve been smart and bought the whole world, and if you’re still investing then, as I’ve said before, crashes are like Black Friday for shares, only this time it’s Black Friday 2013 prices we’re getting. The market will recover, and the all-time high we had earlier this year will be beaten, I guarantee it. I can’t say when, it could be 6 months, 2 years, 10 years or more, but one day this crash will look like a minor blip in the unstoppable upward march of the markets.

There are concerns of course. For instance my wife runs a very successful hair salon, and now that we’ve reached a full lock-down, she’ll need to shut her doors for the next 3 weeks. While the business has some savings, it can’t keep this up for very long and still pay salaries, so clearly it’s not business as usual.

So what are we to do now? All the big finance writers have these smart theories. Stop buying to save cash, buy gold, move into defensive stocks. All I want to know is if this was actually profitable, why aren’t any of them beating the market?

My plan is different, and thank goodness I made a plan when things were still good because it’s making a plan when you’re scared is like shopping when you’re hungry. You just make so many bad choices. This is my own sh1t fan plan:

  • Stay calm, this is not the time for any rash decisions. Doing nothing is way better than doing the wrong thing.
  • I’m working, that means I’m still in the accumulation phase, and in that phase I am not allowed to sell. My only option is what to buy and when to buy.
  • My what to buy is an all-world index, not gold, not bitcoin, not blueberries, not defensive stocks nor cows.
  • My when to buy, is when I have cash available, don’t try time the market, it’s pointless anyway – I’m still allergic to cash, but see to the next point first.
  • Make sure my emergency fund is fully loaded – Mine has a min and max range to it, I’m keeping it at max right now.
  • If the market drops more than 20%, the holiday budget gets trimmed (I started writing this before we hit 20%, my holiday budget now gets invested).
  • If the market drops 50% I shift to my bare-bones budget and invest all the extra cash.

Now of course if I wasn’t working my plan would be significantly different. I haven’t made one for that case yet as my job becomes more necessary the worse the world is doing. For most that isn’t the case, so you’re going to need to sit down and spend some time with a large sheet of paper and a calculator.

Hopefully you already have an emergency fund, but remember an emergency fund is there for sudden unexpected shocks. If you’re in an industry that is going to struggle and possibly not have a job for you in a few months time, that is not a sudden unexpected shock, it’s a car crash in slow motion. You have a couple of months to fasten your seat belt and get preparing.

Everyone has a different plan, but I believe one key feature should be that it’s now the time to start flexing your frugal muscles. Here are some ideas of mine or that I’ve seen floating around on what else you could do. They are not to be taken as advice, merely topics to think about. Everyone is different, you know your specific situation, so you are the best person to make calls:

  • If you haven’t yet documented a bare-bones budget, now is a great time to make one, try to follow it, use the savings to fill up that emergency fund and a potential out of work fund if you’re at risk, but then get investing. It might not be the best time to buy, but it’s the best time to buy we’ve had in quite a few years.
  • If you’re planning any leave, you might want to reconsider for two reasons. 1) You don’t know if you’ll be able to travel, and 2) your leave is actually also an emergency fund. I have 60 days in my leave account, if I was to lose my job today that would give me 3 months salary. If I switch to my bare-bones budget I’d have 12 months of runway just using that.
  • On the topic of work, this is the time to make your boss love you. Are you an expert with Zoom? Can you help others work with Google Sheets or Excel online? Can you think of ways to cut costs for the office, or bring in extra cash? This is probably not a good time to pull any F-You money stunts. Staying employed should be a priority.
  • See if you can come up with a side hustle. Have you got a hobby that you could monetize? Is there a new opportunity developing that never existed before? Is there something you can do in the gig economy? My wife is using her free time create hair tutorials and posting them onto YouTube, no money now, but potentially in future, and maybe new clients or employees once this is all over.
  • If you’re someone with stocks and bonds, you should have a re-balancing schedule. Moving bonds into stock when the market is down is a good thing to do, in fact many consider that to be the key reason for holding bonds. You want to do it according to your plan, not on a whim. Nobody can time the market perfectly, and that includes you.
  • I know someone who has a home loan with a decent amount of spare cash in it. He previously said that he expects a 50% market crash to be a once in a lifetime crash, so for every 10% the market drops he moves 20% of his access bond into the market. I think it’s an interesting idea, but personally I’m not a fan of investing with debt.
  • Someone suggested getting a couple of months ahead on bills. Something to think about, but I wouldn’t do this with a bill you could cancel in a bare-bones budget scenario.

If you have any other tips I think we’d all love to hear. Leave a note in the comment section below.

There is one positive aspect to the massive market crash. It’s an opportunity to fix past mistakes without having to pay any capital gains tax. If you’re holding on to an expensive fund, or bought in a single sector and have wanted to move but never did because of the tax consequences you can do that now probably paying no CGT at all.

That’s all for now, please look after yourself and your family, and thank you so much to the health care workers, pharmacy and grocery store employees petrol attendants and all the others who have to put themselves at risk every day so we can survive this.

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