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Investors typically characterise the overall movement of stocks in one of two ways. It could be a “bull market” where company stocks (i.e. equities) are rising in value, which generally described global markets between March 2009-2020; a period widely regarded as the longest bull market in history. Indeed, within that time frame, the S&P 500 returned 339%! Alternatively, the wider financial environment could be described as a “bear market”, where stocks are on the decline; possibly very sharply.
At the time of writing in April 2020, the world is facing quite an intimidating bear market. On the 12th of March, the world’s leading market indexes experienced their worst day since 1987, as they reacted to the COVID-19 outbreak. The FTSE 100 fell by over 10%, eradicating £160.4bn from the market. The S&P 500 dropped by 9.5% and the Nasdaq ended 9.4% lower.
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Many people have reacted with fear to the falling markets since March 2020. Pensioners are, understandably, worried about contracting value within their life savings, whilst even young investors (with many years ahead to make up for lost returns) are considering other assets, such as gold, as a short-term haven.
However, our financial advisers here at Cedar House have also noticed two other common reactions to present market conditions. One approach is to “stay the course”, as investors continue their monthly contributions to their portfolio. Another investor reaction, however, has been to put more money into their equity investments. Here, the tactic is to buy more stocks “on the cheap”, in anticipation that these equities will, in future years, rise in value.
Which investor reaction is correct in light of COVID-19?
If you are an investor or have a pension, should you adopt any of these three attitudes? Are there any dangers inherent to each one? One of the difficulties in answering this question lies in the fact that people have different investment philosophies. For instance, some investors believe that it is possible to “time the market”. This is the approach commonly taken by active fund managers of mutual funds, which buy and sell equities on behalf of investors, based on research and “gut feeling” about which ones are about to rise and fall in value.
This investment philosophy can, in different circumstances, lead to investors pulling money out of certain markets or putting more into them. After all, if you anticipate that equities within a certain sector (e.g. hospitality) are about to take a dive, then it might make sense to move them to another sector which holds better prospects within current market conditions. In early March, for instance, many investors were rushing to put more money into companies such as Kroger, a food retailer/drugstore saw an 8.5% increase in its stock (to $33.60) as consumers stocked up on staples to weather the COVID-19 storm.
Whilst investor decisions such as these appear to make sense in the short term, they often fail to pay off in the long term. First of all, how can anyone accurately and consistently predict which sectors, markets and industries will do better, or worse, within the current pandemic and its aftermath? For example, many companies which investors had “written off” are now changing their production lines to help fight the outbreak. LVMH, for instance, has changed from making perfume to making hand sanitizer, whilst many luxury hotels have repurposed themselves as quarantine centres.
Secondly, “timing the markets” is well-known to be an ineffective investment strategy. Research consistently shows that even professional active fund managers fail to predict the market on a consistent basis. In 2019, for instance, the S&P 500 outperformed nearly 70% of its active fund manager counterparts over one year. Extend the timeline to five years, moreover, and the figure rises to 78.52%.
The case for staying the course
One of the common investor complaints heard by our financial planners at this time is that investors have “lost money”, in the wake of COVID-19. Here, it’s important to remember that, until you sell your equities, your losses have not been crystallised and you have not “lost money”. Think very carefully and consult your financial adviser before panic selling, or jumping out of the market impulsively.
Rather, stick to the investment strategy and risk tolerance you agreed with your financial adviser at the very beginning. You should have anticipated market falls when these were agreed, even if nobody could have predicted the COVID-19 outbreak. So, really, has anything changed? Should you entirely change course, simply because the “good times” are over? If you feel that way, then perhaps you should ask yourself whether you were really honest with yourself at the beginning, when you chose your attitude to investment risk!
Remember the benefits of staying the course, and continuing your investment contributions. The markets have seen large dips before and bounced back. Investors who jumped out of the stock market during the 2008 Financial Crisis, for instance, commonly regretted that decision over the next 5-10 years as the markets grew further. Also, bear the advantages of “pound cost averaging” in mind during this period of market volatility and decline. This lowers your exposure to falling markets in the short term and opens up the possibility of further investment growth over the long term.
If you would like to discuss your financial plan or investment strategy with a member of our team, then get in touch today to arrange a free consultation:
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