COVID crash

Did you lose your nerve in the COVID crash?

How have you got on during the recent market turbulence?

It’s been a hairy ride – right?

Did you lose your nerve and cashout for a period – or maybe just thought about it? I certainly know a number of colleagues that moved sizable investments to cash and that surprised me. That spurred me on to calculate whether they might have gained or lost by this decision. 

Read on for some cool charts and analysis!

Losing your nerve during a crisis

losing your nerve

February and March were particularly brutal in the market and at times I felt like I was losing my mind. I personally did not move any investments to cash in that period, but I had the opposite problem. My bonus was paid in February so I had to decide how I was going to invest that new cash. 

If you’ve read my article That Dry Powder You Have? (You’re Better off Snorting It) you’ll know that I’m not a fan of keeping cash on the sidelines. And if you’ve read my articles on lump sum versus dollar cost average investing (Lump Sum or Dollar Cost Average Investing? Part 1) then you’ll also know that I’m not a fan of dollar cost averaging. 

So this presented me with a dilemma. 

Do I stick to my principles and invest a sizable amount in the market in the middle of a global pandemic with the fastest drawdown in stocks in modern times, the lowest oil price in history and the whole yield curve under 1% ?

I actually wasn’t quite that brave. I drip-fed the money into the market over a period of about 4 weeks and also identified an alternative to stocks in high yield bonds that I though felt like a good buy (Looking for value in the current market). Little did I realize I was front-running the Fed on that trade – but hey if you can’t be smart be lucky – right?

Have a plan

I’m not going to take the usual tack here of telling you that you need to have an investment plan and stick to it. Or even that you should have a written investment strategy and stick to it (a great idea btw). 

What got me through this period without losing my nerve was that I have done considerable work in assessing the sources of my wealth. I have four main sources of wealth: future earning, pensions, house equity and liquid assets. Even by writing-down my future earning with a COVID-fuelled pessimism I’m super-lucky and my liquid assets (401k, brokerage accounts, etc…) are probably less than half my wealth, so that gave me the strength to not liquidate everything to cash during that period. 

You either need to follow my route, or have a plan or preferably both. 

Did Moving to Cash Actually Work?

I guess I wasn’t surprised to find a number of colleagues that moved sizable allocations to cash during the crash, but I did wonder how that would work out for them. I actually don’t know whether they have re-entered the market but I felt this was ripe for modeling. 

I looked at S&P500 equity returns from the beginning of the year to June 26th. Over this period the return has been around -6.7%. [Note: this is one of the few times I’ll allow you to take nominal and not real returns, and I’m not annualizing any of my returns in this article either]

I then looked at what would have happened had I exited equities into cash for a period, and then later re-entered the equity market.

The following chart shows the growth of $100 over this period of 122 trading days. 

Equity returns

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I wanted to look at this methodically. And so I looked at every possible permutation of exiting the market to cash followed by re-entering the market at a later date. The only rules were:

  • I only analyzed the 122 trading days year-to-date
  • I assumed the cash had no earnings while out of the market
  • The re-entry date was after the exit date (obviously!)

There were 7,381 possible scenarios. 

Of these, 4,117 were scenarios that improved upon doing-nothing. In other words there were 56% of scenarios where it would have been beneficial to move into cash for a short period, and 44% of scenarios where it would have been worse. 

The chart below show the distribution of returns. You can see that there is a large upside tail, with some scenarios producing returns of 20% or more. These are clearly scenarios where you sold to cash before the crash and then re-entered as the market quickly swung upwards. 

COVID crisis

Digging Deeper

I guess this all kinda fun. But not really that insightful or useful. If we all had perfect vision we would hop out and  hop back in the market and make cool money. Let’s take a different vantage point and look at all the results at once. 

I’m going to plot all the scenarios and mark with a colored point the return. A blue return is high (and good) and red is a low return (and bad). 


The distance along the horizontal axis indicates how many days in the year until you exited to cash, and the vertical axis gives the number of days in the year when you re-entered the market. It is a triangle and not a full rectangle since the re-entry day has to be later than the exit day. 

The do-nothing scenario is yellow-orange and anything more green-blue is better than do-nothing, and anything redder is worse than do-nothing. 

It’s more understandable if I carve it up into different regions. 


Region A

Region A simply consists of scenarios where the re-entry to the market happens before February 19th. And remember that since the exit day is before this then all these scenarios have exit and subsequent re-entry before February 19th. 

What’s the significance of this? 

February 19th was the high-point in the market before the crash. You can see that the color is orange and a little more adverse than do-nothing. In other words being out of the market in cash for a few days before the crash was slightly adverse. No surprise, given the market was rising at this point. 

Region A contains pointless scenarios. Who would have gone into cash, and then re-entered the market during this period? 

Region B

Region B consists of scenarios where you exited to cash before March 23rd and you re-entered the market  after Feb 19th. March 23rd was the low point in the market so this is saying that as long as you exited to cash before the low point then you would have benefited compared to the do-nothing scenario. 

This is a straightforward result but perhaps a little surprising. It’s saying that you needed to get out before the bottom and you could have re-entered at any subsequent time to improve on the do-nothing scenario. 

I think this works so cleanly because the crash and subsequent bounce-back was such a clean V-shape. If there had been more of a W-shape (and there still might be…) then this picture would be more complex. 

Region C

Region C consists of scenarios where you missed the bottom and moved to cash after the bottom. This was sub-optimal and meant you missed some of the bounce-back. Region C is red meaning it’s worse than the do-nothing scenario. 

Again, this is straightforward, but quite surprising. The clean V-shape means that we have enjoyed a pretty linear recovery (to-date) and so moving to cash during the recovery phase was a bad decision. 

COVID crash

Too Academic?

Does this all feel a little academic and pretty obvious stuff dressed-up with fancy charts?


I agree!

I think it’s more useful to divide the chart up with more intuitive regions. Let’s list out some important dates. 

  • Jan 30th – World Health Organization (WHO) declares a Public Health Emergency of International Concern. But cases mainly restricted to Wuhan, China. 
  • Feb 19th equity market high
  • Feb 29th first US death reported. 
  • Mar 11th. WHO declares a pandemic. 
  • Mar 23rd equity market low. 
  • Mar 25th Democrats and Republicans strike a deal on the stimulus package.
COVID heatmap

Region X

When you look at the speed of the timeline you can see how quick the market reacted. The US equity crash happens before the pandemic has become established in the USA. I’m gonna say that an investor would not have had the foresight to move to cash on Jan 30th after the WHO warning. But instead would only move to cash after the start of the crash after Feb 19th. 

Hence Region X is grayed-out and consists of scenarios that moved to cash before the crash. 

I think we can safely eliminate those as unrealistic for most mortal investors. 

Region Y

Region Y consists of scenarios where the re-entry point to the market from cash is before the market bottom on March 23rd. 

I’m gonna say that in that heart-stopping market drawdown period there were very few investors willing to go back into the market. And so Region Y has been grayed-out. 

I don’t believe many mortal investors would have re-entered before March 23rd. 

Region Z

This leaves the remaining scenarios in Region Z. 

I believe these are the realistic scenarios where an investor might have flipped to cash and then flipped back into the market. 

You can see most of Region Z is red (bad) but there is a sliver of green/blue on the left. This indicates that you would have needed to exit to cash very soon after the market started crashing and not left re-entry too late in order to capture some potential upside. It was a pretty narrow window of opportunity. 

What did you do? Did you hold your nerve? I don’t blame you if you got out of the market, but hopefully you learned something about your risk tolerance during that process. 

This analysis is only year-to-date, as of writing. And if we see more of a W-shape to the equity market recovery then all bets are off, and I’ll have to re-do this analysis….

Author Bio: I started actuary on FIRE as I did not see any actuaries taking a prominent role in the personal finance area and wanted to remedy a shortage of actuary jokes and write for those that appreciate rigor with fancy charts. In my regular day job I advise corporate US on investment and retirement strategies. I’m a qualified actuary, investment adviser and have a PhD in mathematics and reserve the right to have the occasional math post. 

4 thoughts on “Did you lose your nerve in the COVID crash?”

  1. Pretty graphs. Why is it the only market in the world that has actually V’d is the QQQ? Even the DIA is still down 10% YTD. In case you didn’t notice all your money is still bet on black. Betting on black pays out only 47.4% of the time. With those odds the smart thing to do is take some money off the table and put it back in the stack before the odds eat your lunch.

    1. actuary on FIRE

      Is it surprising that $QQQ has V’d? Feels like tech has been the real beneficiary in all the COVID chaos. Shopping online, zoom, etc..

      I think the smart move is diversification. I’m just not totally happy with potential options to diversify. Investment grade credit got hit, REITS got hit. I think long Treasuries remain the smart diversification.
      Thanks for visiting Gasem!

  2. Thanks for your insights on this blog.

    Right now I am learning financial concepts such as Sharpe ratio , Efficient Fronter , Equity Beta , Alpha , sequence of returns risk etc.

    Can you recommend any blog , podcast , book , video etc that does the same type of meticulous DIY investment analysis (with graphs and charts) and also could teach us how to perform similar DIY investment analysis simulations?

    Also , a blog(s) by someone who is regarded somewhat as a gadfly , contrarian or miscreant that dares to question conventional financial wisdom?

    Thanks a million for all you are doing.

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