Lessons Learned from the Covid-Bear

Late February 2020 saw the beginning of a swift downturn in equity (stock) markets. Increasing concerns on the potential health and economic impact of Covid-19 infections here in the U.S. were the catalyst for what was the fastest decline to a “Bear” market1 in history2. Largely a China issue at that time, market participants began to realize that the pandemic was about to become more of a global issue. Through this difficult period, I had a note pad handy at my desk, keeping notes of the events and investor behavior and emotion with the intention of reviewing once calmer seas prevailed. Following are the top three financial lessons learned (or reinforced) from the Covid “Bear” market. The focus here will be solely on financial lessons learned, not to minimize the personal health and safety concerns.

First Lesson: There is no substitution for an emergency fund. Lives can be turned upside-down overnight. Jobs can be lost, kids can be sent home from school, and businesses can be forced to close, all causing personal and financial disruption. Those with financial interruptions caused by Covid and had adequately funded emergency funds, were less nervous about near term market uncertainties. While every situation is fact dependent, the standard for personal finance is to have three to six months of living expenses saved specifically to be used only for emergencies. A strong financial foundation begins with an emergency fund.

Second Lesson: Clearly identify short-term vs. long-term financial goals and allocate monies appropriately according to those specific time horizons. Money is a tool and should be saved or invested with the time-to-use in consideration. For example, cash or savings type allocations are more appropriate for shortterm financial goals. Investors that identified a clear time horizon were less likely to be concerned about fluctuations in equity markets as they understood short-term needs were met with shortterm monies and long-term goals are met with long-term investments. A proactive written budget, accompanied by focus and self-discipline, will identify financial priorities and help allocate monies towards those priories and time horizons.

Third Lesson: When life gives you lemons, make lemonade. Market downturns can be real gifts. Strategies such as ROTH conversions, rebalancing for proper diversification, or investing new monies to take advantage of lower share prices are wise to consider in market downturns. Don’t be victimized by market downturns but rather seize the opportunity.

As Rafiki, Simba’s confidant from the Lion King said, “The past can hurt. But the way I see it, you can either run from it or learn from it”. The Covid-Bear was short lived as the equity markets rebounded showing the best 50-day rally ever from the bottom of the late-March 2020 “bear” market3. Reflect on yesterday and learn from mistakes, but make adjustments as necessary for a more secure financial future tomorrow.

Adam Smit is CERTIFIED FINANCIAL PLANNER™ with Adam Smit Investment Management LLC and a registered principal of LPL Financial. This article is for general information only and not intended to provide specific advice or recommendations for any individual. Adam Smit Investment management LLC and LPL Financial do not provide tax or legal advice. All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future returns. Securities offered through LPL Financial. Member FINRA/SIPC. Adam Smit Investment Management LLC is not an affiliate company of LPL Financial.

1 – A “bear” market is defined as when asset prices fall by 20% or more from their peak 2- LPL Research, 2020 March 12th. The Fastest Bear Market Ever. www.lplresearch.com/2020/03/12/the-fastest-bear-marketever/ 3 – LPL Research. 2020 June 4th. Best 50-Day Rally Ever. www.lplresearch.com/2020/06/04/best-50-day-rally-ever