There is no better time to invest than when lots of other investors need their money back. During market crises like the present the premium on liquidity skyrockets. I.e., if you have cash on hand that you can commit to investments for an extended period then the people who don’t will let you scoop up assets at firesale prices. Hence, the rules for investing in a market crisis:
1. Don’t abandon investments unless you need cash. If you sell during a liquidity crunch you become one of the people paying the liquidity premium.
2. If you buy during a liquidity crunch you collect the liquidity premium. Therefore you should revisit your asset allocation and consider reallocating your investments to increase your exposure to distressed assets. (Don’t try to pick stocks or sectors — the information premium during a market crisis can also skyrocket, which means if you don’t have extraordinary information you are at a heightened disadvantage.) For example, last week a lot of institutions needed to move into short-term treasuries. They were dumping corporate bonds, stocks, and just about anything else to do it. Demand for treasuries got so high that buyers were literally paying out for the right to own them (i.e., interest rates went negative). If you held treasuries and didn’t need the exceptional margin of security they provide it was a good time to cash them in and buy the things everyone else was selling.
In general your portfolio should reflect your investment time horizon and risk aversion — i.e., how long you can keep your money invested, and how much interim “pain” you can tolerate. The more pain, the more (potential) gain. During a liquidity crisis you may perceive that risks have gone up and thus be inclined to sell risky assets and move to more liquid assets. That is exactly the wrong course of action, because it turns you from a liquidity provider into a liquidity demander. If you succumb to the urge to pull money from the markets you will find yourself in the notoriously underperforming pool of retail market timers who always buy near the top, when everything seems great, and sell near the bottom, at the point of “maximum pain.”
When you see falling asset prices during a liquidity crisis do not think, “Shoot, those assets are riskier than anyone thought, I had better get out too.” Instead think, “Wow, the market is willing to pay me even more to move into those assets. Last time I considered those I didn’t think the extra return was worth the risk. But since that return potential is even higher maybe now it is worth owning them.”
How can you collect the handsome liquidity premium that exists in the current market? If you own CDs, consider paying the early-withdrawal penalty and putting the money into corporate or muni bonds, whose spreads over treasuries have spiked to record levels. If you already own bonds consider moving to higher-risk asset classes, or else consider leveraging up using bond CEFs.