Systematic risk, the market, and Covid-19

(as of March 15, 2020 – lots has changed BUT the history remains the same.)

When I was getting accredited last year, my mind blew when I read about systematic risk, defined as the uncertainty inherent in the economic system. 

WHAT?!? I thought — thinking the system is based on lots of uncertainty and a little math isn’t just for liberal-radical wingnuts like me? ALL THE MONEY PEOPLE LEARN THAT THE SYSTEM IS FAULTY??

I felt like my previously “secret” understanding of money was suddenly super basic: like when you learn that most people know about wine even though you only learned “pinot grigo” once and just pull it out every time you’re at a fancy dinner (just me?). 

Anyway — it’s commonly accepted that there are risks to investing, because the system has elements that can’t be controlled for. One of them is “market risk” – the economic impacts of reactions to what other people think about the market (it’s falling – sell!), speculation (it might fall – sell!), nervousness (everyone else is selling – sell!), all of which lead to prices falling, since there’s less demand and perceived reduction in value.

BUT, if you think the financial sky is falling, feel like the current stock market situation (downspiral due to coronavirus impact) is never before seen and are feeling like there’s a financial end time happening: it’s systematic risk at play…

This is part of a cycle. It’s not new: this up and down volatility is PART of market investing.

Every specific instance of a downspiral is going to be different. Last time it was crappy mortgage products, the time before it was overvalued companies on a baby internet, before that it was a different oil crisis** – value drops occur on average every 8-11 years, so we’re right on time for this one. Below is a video on systematic risk, for your learning and edutainment.

If you have money in retirement or other investing accounts, it can feel really crappy to see it lose value, but:

A reminder: You only *permanently* lock in that lower price if you sell. You own a share or a fraction of an investment, that is valued by others, which creates its market price. That valuation, and therefore price, changes daily — but it’s the 10 year averages we look at to get the best information and to anticipate outcomes. In a given 10 year span, there’s likely to be one drop and one or two runs up in value. 

Investing is a 10, 20, 30, 40 year project, because your life is, hopefully, many more decades in front of you and the point of investing is to create wealth on a decades timeline. So, what happens in a given week can be crappy but it’s not the end result.

We don’t know what will transpire this time. We only have the past to help us guess, and over the last 100+ years, in ANY 15 year period (including the great depression and other financial crisis), there was positive return: invested money made money. There’s no guarantee, but history indicates holding on pays off, if you’re working a long timeline.

Of course, there’s not just the distant future to think about, but the immediate present.

Keeping your emergency fund and short term money needs in high yield savings accounts is a GREAT idea and the last two weeks show us why: the market can tank whenever. The money you need in the next few months to two years is, ideally, really stable: either in the form of work you’re confident you have or savings you can access. 

For lots of workers, though, work might be less stable in the coming months, and we should be prepared to see some gnarly downstream effects of Covid-19. 

While it’s health impact may be small (and tragic), it’s economic impacts might be much larger: 

  • from decreased & interrupted travel causing airlines and hotels/AirBnB hosts to struggle and, some workers are losing work because of it
  • to supply chain interruptions – most of the materials that make masks was made in Chinese factories for example – making certain products more expensive
  • to conference cancellations impacting local folks who depended on travelers for income experiencing financial losses, like the massive blow to Austin local creative economy that was SXSW being cancelled

The Risk

To me, the risk in the present moment isn’t as much in long-term investing ups and downs – that’s normal – it’s in the short term cash flow type needs that might pop up: I remember the two year recovery from 2008! I traveled in a van and lived on UI and random gigs, so let’s not fearmonger: it’s not that you have to have money today to be fine, it’s just that you might want to think about where you’re going to get the money you need, and not proceed to further lock it up in investments.

Conversely, if you have cash, it might be tempting to “buy the dip” and buy into the market when it’s valued low (or to get in on a property as mortgages are at record lows!). As long as you are being thoughtful about getting income or keeping savings on hand to cover an extra long possible recovery, there’s lots of options. 

**Saudi Arabia just announced they’re going to up oil production by several million barrels, intentionally driving down the price of oil to compete with Russia and saturating the market, which is setting us up for another overall market drop. It’s going to be another wild week, friends!

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