A three-point plan for coping with a potential second wave stock market plunge

One of the big morale boosters coming out of the worst days of the pandemic was the stock market surge.

Now that COVID-19 cases are again rising sharply around the world, it’s worth looking at the potential for another decline and then considering what you’ll do about it. A three-point plan: Take any money you can’t afford to lose and get it out of the stock market now; avoid panic-selling if there is a decline, and be ready to start shovelling some of the money you’ve been saving into the market.

A high level of financial panic was reached in March as the pandemic hit and the economy was locked down. We are not heading into panic 2.0. Central banks have taken giant steps to ensure corporations and governments can keep borrowing at low rates, and it’s very likely that economic closings would be precisely targeted to quell the spread of the coronavirus and not as broad-based as in March.

But stock prices reflect a degree of optimism that leaves them vulnerable to setbacks in the fight against the virus. There’s strong support for stocks in the form of government stimulus to keep the economy going and, most importantly, terrible returns from bonds. On the other hand, disappointing prospects for economic growth and corporate profits would weigh on stocks, as would delays in getting a vaccine approved and into the world.

The benchmark U.S. and Canadian stock indexes are up 32 per cent and 26 per cent, respectively, over the past six months, but they’ve sagged a bit in the past 30 days and we’ve seen some sharp one-day declines lately. You can feel anxiety levels rising as you talk to people about the latest developments in fighting the pandemic. Unless you’re mentally prepared, further sharp declines for stocks could unnecessarily add to your distress.

Seniors, it seemed your retirement savings were shrinking so fast in March that they’d never recover. But after a strong run for the financial markets, a 60-40 portfolio of stocks and bonds should have been up for the year through Aug. 31. Stock markets are resilient, especially when the competition from the bond market is so weak as a result of low yields.

I have written this a bunch of times lately, but the importance of retirees having a two- to three-year cash cushion in their savings cannot be overemphasized. If stocks fall hard, draw living expenses from your pile of cash and leave your stocks and equity funds to recover.

Anyone who has money that they cannot afford to lose in stocks should get it out, right now. This includes seniors who don’t have their cash cushion set up, home buyers who got tired of earning nothing by keeping their down payment money in a savings account and, more broadly, anyone who will need their money within five to 10 years.

If stocks do fall hard, a guaranteed way to sustain maximum damage is to sell your stocks or equity funds. Panic selling is tempting because it quells panic – you can’t lose any more money. But you can also cause long-term wealth impairment if you stay in cash and miss the next upturn in the stock market. How many people who bailed in late February or early March got back into the markets in time to catch the rebound? I hear crickets.

The all-around best and smartest thing you can do if stocks fall is to buy more stocks. A cult of investing in individual stocks has emerged in the past six months, thanks to the huge success of a small number of stocks that are mostly found in the tech sector.

Picking the next round of winning stocks will be harder, so consider buying instant diversification through an exchange-traded fund that tracks the indexes you keep reading about in the financial news – the S&P/TSX Composite or the S&P 500. As go these indexes in the rally back from the next market decline, so goes your investment.