What does the toilet paper shortage teach us about stock markets?
Thanks for coming back for the latest edition of Planning for your Purpose, Telos Financial’s blog, where I discuss different topics related to financial planning. CERTIFIED FINANCIAL PLANNER™ professional Dennis LaVoy is Plymouth, Michigan’s holistic financial advisor serving clients throughout the mitten as well as across the country.
The primary purpose of the blog is to introduce financial planning concepts and questions I receive from clients that I believe are important. I want to start discussions that will educate, benefit, and improve your financial life, ultimately, to help you focus on your telos!
You may not think toilet paper has a lot to teach us about investing in the markets, but maybe it does.
Ok, ok, not really just toilet paper…the toilet paper shortage going on right now. I think this is endemic of the type of behavior we see in stock markets and the actions we see are essential to remember when you are investing in the markets.
Get to it already.
Fine. Here are three lessons I think you can learn from the Great Toilet Paper Panic of 2020 that will serve you well in your investing life:
- First, be prepared for the worst.
- Second, people and the markets are irrational and unpredictable.
- Third, have a plan.
Prepare for the worst
I don’t think anyone saw the COVID-19 pandemic coming from more than few months away and I don’t think there was any way to prepare much for it, unless you were a doomsday prepper specifically preparing for a pandemic. It’s hard to be ready for every scenario. Though we did have some lead time through watching other countries, and could have made some shorter term pandemic specific preparations, that’s not what I mean. I’m talking about longer term preparations.
What I’m talking about is being prepared for the worst case scenario at any time. In this case, related to TP and the markets means: you should have enough TP on hand to last a bit and in the markets, means you should to have an emergency fund to help you float major crises. You have to decide what timeframe is right for you, but I think it should be more than a week. Rule of thumb financial guidance is three to six months. Maybe one month is appropriate?
Alternatively, instead of stockpiling TP, you could get a bidet (not to brag, but we fortunately got one a couple months prior to this situation). Even with the bidet we still use toilet paper, especially with a recently potty trained toddler and a new pottier in the house both flushing as much as they can whenever they can.
Similarly, while you probably weren’t prepared for a pandemic, you can’t prepare for every possible market scenario either. We know that market ups and downs will happen. What you can do is have an emergency fund to allow you to ride out any market corrections. Your emergency fund of secure, liquid investments is the equivalent of a toilet paper reserve or bidet. Again, the size of the emergency fund is specific to each individual or family, but three to six months is the standard advice.
People and the markets are irrational
A person may be rational, but when observed as a herd, people act as the herd. People see other people buying lots of toilet paper, they don’t want to be left without, so they buy lots of toilet paper. It quickly spirals out of control and in short order, no one can find toilet paper because there’s been an irrationally high demand for toilet paper. COVID-19 doesn’t cause people to need more toilet paper, there’s no underlying reason to believe you’d need more toilet paper. There is uncertainty with change or when scary things happen. There are some concerns that with a shelter at home scenario, you might not be able to travel to buy it, which is reasonable. But if there wasn’t a run on toilet paper, we’d still be able to get it at a grocery store or have it delivered.
The markets are similar. On a theoretical level, they are based on people’s expectation of the value of companies in the near term. Typically, if you think a company will be more profitable in the future, you expect the stock price to go up accordingly. Now, a virus doesn’t necessarily mean profits will decline, but when there’s uncertainty, people move toward safer decisions or investments and that spirals out of control.
In this case, if the economy is shut down, if people can’t work due to shelter at home orders, being ill, etc the economy will be worse by definition. It will decrease profitability of companies over the short term or maybe longer depending on how long these preventative measures last. I’ve heard analysts who said the market correction we have seen recently would coincide with a 60-80% decline in profits. In my opinion, the decline was an overreaction caused by uncertainty and others overreacting.
The lesson here is: markets and people are irrational. Market movements and demand for toilet paper don’t always mirror reality or the need for toilet paper.
Have a Plan
If you’ve talked finance with me, you know I’m a huge advocate for financial planning. There are innumerable benefits. I firmly believe having a financial plan is one of the best things you can do financially for yourself and your family.
Similarly, with toilet paper, you need a plan, like with financial planning, an emergency reserve. But, just like with financial plans, things change over time. Maybe your plan changes to get a bidet instead. Maybe you make a schedule and monitor the grocery stores with your friends. Maybe you can get some from toilet paper from a friend or neighbor until supply and demand normalize. There’s no one size fits all plan, each one is unique. There are lot of options and I’m not in the business of managing your bathroom supplies.
The markets are irrational. People are irrational. Keep that in mind when investing. Make sure you are not taking more risk than you can with your investments.
Again, first, be prepared for the worst. Have an emergency fund of savings and of toilet paper. Everyone is different, but it always makes sense to be prepared for some tough times. Second, because people and the markets are irrational, it’s impossible to predict how they will react in the short term. You are much more likely to have success in anticipating what will happen in the long term. Last, have a plan. I’m a strong advocate for financial planning and I believe that having a financial plan will greatly improve your financial life. Similarly, having enough supplies to properly use your lavatory will help improve your life in general.
If you’d like to discuss your financial situation or create a financial plan, Telos Financial welcomes the opportunity to talk with you. Contact us today to schedule a no cost or obligation introductory meeting. Telos is a financial planning firm serving Michigan’s high income and high net worth millennials, recent college graduates, and small business owners.
Telos Financial is a fee based, holistic financial planning firm located in Plymouth, Michigan serving young professionals and their families. Dennis LaVoy is a Certified Financial Planner® Designee and a Chartered Life Underwriter®. Dennis is proud to be the owner of Telos Financial, a firm based in Michigan focused on serving high net worth and high-income young professionals, millennials, and those preparing for retirement. He founded Telos Financial and to provide fiduciary financial services to families across Michigan including Plymouth, Canton, Ann Arbor, Detroit, and as well as all over the great United States of America.