Coronavirus Impact on Investing: Where Do We Go from Here?

Since last month’s newsletter, the economic landscape has certainly taken on a completely different complexion. We’re now in the midst of worldwide pandemic which has started the “the great shut down” in many cities and towns in the USA and many other countries. Severe economic recession is the likely reality of life in the near future.

The emergence of Covid-19 is what’s known as a “Black Swan” event, the ripple effect of which has impacted our lives and the market in a manner not seen or envisioned in our lifetime. The supply chain from China has been impacted, the travel and hospitality industry has been devastated, the entire “brick and mortar” business sector has been turned off. Only essential businesses are open, our streets are empty, and NYC (and many other cities and towns) looks like a “ghost town”.

As of writing this, many companies have made the switch to telecommuting for their employees. The stock market’s volatility is up exponentially, and has already reached recessionary level declines. There has been a flight for safety into U.S. Treasuries, with prices up and yields down. We are most likely going to zero, even negative rates.

US Government has been in the urgent stimulus mode, passing multiple rounds of COVID-19 financial support packages. The most recent 2T+ package is of unparalleled size and depth. It will most certainly support the economy. However, it is likely that there will be more will be needed if the “great shut down” goes beyond 8 weeks. Prudent doctors just don’t want to speculate on the subject, but rather wait and see how the Corona virus new infections data will play out. The uncertainty of the growth of the spread is extremely high. Social distancing is slowing the spread for sure. However, it is very difficult to say when will this be over, and when can people go back to work.

Nevertheless, there are a few areas that stand to benefit from the pandemic and chances are you’re already aware of one or two of them from first hand experience:

• Tele/Video conferencing
• Distance learning
• Virus related medical research/treatment
• Home-based entertainment

Unfortunately, we should brace ourselves for an overall very severe recession in 2020. The economy has hit a brick wall and the “great shut down” is the day to day reality. US Government has now fired all its major support guns:

• FED cutting rates and providing massive liquidity
• COVID-19 multiple rounds of support legislation

Is this going to be enough?

It’s hard to say, and the time will show. Politicians are talking about the “V” recovery. But we are not near the bottom of it, not even close yet. We need to be patient, adjust to this new world, and prepare for a prolonged “shut down”. If we are wrong and things turn for the better faster, then we’ll welcome that news.

Economic Distress Leads to Great Buying Opportunities

Despite the exceptionally negative tenor of the times and the depth of economic distress, however, as investors, we should not lose sight of the fact that there will be some tremendous buying opportunities that present themselves in the coming days. That said, you should be careful not to try and catch a falling knife.

From my experience, the best opportunities will be the ones with low risk and defensive characteristics along with strong downside protection. You should focus on forward cashflow with good predictability and reliability such as real estate deals in Quadrant 1.

In fact, I would focus exclusively on deals in Quadrant 1 and Quadrant 2, being mindful to steer clear of Quadrants 3 and 4.

Moves to Safeguard Your Wealth

Now is a good time to take some or a substantial amount of your money out of the stock market and move into the alternative investments space, specifically Real Estate. Goldman has advised that investors increase exposure to Real Estate in light of the heavy market volatility and significant moves downward.

One may also consider buying “downside protection insurance” in the form of Put options or take short positions or utilize more complex trading strategies to hedge the risk. Obviously, in the case of the latter, professional trading advice would be needed to do this effectively.

Why You Should Diversify Out of the Stock Market into Alternatives

Here are some of the basic reasons why you should diversify from the stock market into alternatives, Real Estate funds, and syndications:

• Lower Volatility: Private Real Estate funds and syndications are private by nature and are not tied directly to the stock market.
• Better Predictability: better cashflow and value-add driven appreciation
• Working with People You Know, Like, & Trust: Integrity, experience, track record, good communications and updates when it comes to fund managers with whom you can get to know.
• Well-Understood Strategy: It’s like a wellness strategy when it comes to asset selection, diversification, risk mitigation, and value-add work which tend to be more transparent when you work with a private fund rather than when you invest with a public company.
• Cons: There is a downside in that there’s less liquidity when you invest in real estate; but in this case, you’re sacrificing liquidity for better predictability, lower volatility, and better cashflow.

Building Your Portfolio to Last Through Market Cycles

Among the first things an investor might do in an environment like this is to go back and rethink portfolio goals so that they’ll last through various market cycles.

Clearly, this is not what we think about at all when things are going well, but when we start experiencing the pain of loss, it might be time to start asking, “Why am I doing this?” “Am I investing for retirement?” “College?” or “To leave a legacy?” Your portfolio goals matter and then they’ll help you make investment decisions.

After establishing your portfolio goals, then the next step is to create an allocation model of which products in which you want to invest. If you have a plan, you’ll know when to disregard deals that come along that may appear tempting but don’t fit at all versus deals which do.

This will even give you the capability of closely scrutinizing deals that do appear to fit so you can determine exactly how they work and how much you should invest in them. Build your portfolio around funds, syndications, partnerships, and individual deals.

Those are building blocks in real estate, but your portfolio should be diversified, and they should be assembled on solid foundation blocks and with deals that fit your goals. From that point, you monitor and adjust.

These goals aren’t necessarily specific to the current market, but they are more relevant now than ever before from the point of view that if you didn’t pay attention, you are now because your portfolio is taking a beating. You’re probably rethinking some of your objectives so you can build a better portfolio that can last through market cycles not worrying about what’s going to happen in the market today.

Building Portfolio Goals

Let’s look at some examples of portfolio goals in action, and I’d like to start at the beginning with risk reward tolerance.

1. Risk Reward Tolerance

If you’re not comfortable with market volatility and aggressive investments, then stay away from those deals altogether. That way, you’ll sleep better at night when the market plummets 7%. You’ll be much happier investing in predictable deals.

2. Building Cashflow for Passive Income

The next goal to consider is cashflow and to what extent you’re investing to build cashflow for passive income. Do you need $10,000 a month, for example? If so, you’ll need to make investments that help you build cashflow. If you’re still working and have a successful business, cashflow may not be that big of a priority. In that case you may put more towards growth.

3. Total Return

Your total return objective is also an important goal to set–if you have a certain net worth and are trying to grow at a certain rate. You may have a goal of making 20% every year, but that’s an unrealistic goal; so you must set realistic goals. In this market it might be 10% with a 7.5% cash flow return.

4. Tax Efficient Investments

Likewise, tax efficiency goals are valuable to establish if you’re a professional generating strong income and you don’t require more taxable income; in that case, your investment should be tax efficient. It should have depreciation passed through with less current income and more capital gains.

5. Fully Diversified Portfolios

Full diversification is also part of the goal. When the markets start fluctuating and certain asset classes do well while some fall apart, a diversified portfolio can withstand the ups and downs. In the case of a very focused portfolio, when everything goes up, you go up; when everything goes down, you go down with it too. Diversification helps to smoothen the ride.

Time horizons apply in terms of when you’re going to need your capital; for example, you may want to withdraw a certain amount for a specific purpose. Lastly, my rule of thumb is that approximately 10% of your portfolio needs to be liquid or set up in such a way that you invest in deals that allow you to achieve liquidity.

Wrap-Up

For the majority of the world, we’ve never lived through a pandemic this evasive, so we are defintiely in uncharted waters when it comes to the outcome of this world event. However, it is clear this pandemic is taking a major toll on both the US ecnomocy and the world economy as a whole.

In next month’s newsletter, we’ll be diving into Part 2 and how to properly diversify your investment portfolio. We hope these suggestions on how to safeguard your wealth are helpful for you as you maneuver your investment portfolio at this time. If you’re interested in moving money to real estate as investments, consider our latest fund, the Tempo Growth Fund LLC.

You can contact myself for more information on Tempo Growth Fund (weblink: tempogrowthfund.com). I can be reached at Mike@tempofunding.com or by phone at 917-806-5029. If you’d prefer to have a conversation, please feel free to reach out to me on the number above or at bigmikecall.com where we can schedule a Q & A.

Thanks for Reading!

Mike Zlotnik

Please don’t miss the latest Episodes on Big Mike Fund Podcast:

056: State of Humanity and the Economy During the COVID-19 Pandemic
055: The Market Switch: Turning Residential Properties to Assisted Living

Thanks for reading,

Mike Zlotnik
CEO, TF Management Group LLC

This newsletter and its contents are not an attempt to sell securities, nor to sell anything at all, nor provide legal, nor tax accounting, nor any other advice. The presenter is a private lending and real estate fund management business, and the information represented herein are purely for educational purposes and represents the opinions of the presented. Prior to making any investment or legal decision you should seek professional opinions from a licensed attorney, and a financial advisor.

TF Management Group LLC (TFMG) is an investment fund management company that specializes in both short-term debt financing for real estate “fix and flip” projects, and long-term “value-add” equity deals.