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From the investor’s perspective, 2020 has gotten off to a strange start. In January, many people were looking ahead with great optimism about the markets in light of a strong year in 2019, where expansion in the U.S. had helped produce some of the best annual returns in six years (e.g. the S&P 500 had risen by 29% across the year, and the Nasdaq by 35%). 2020, however, has produced a number of events which have rattled this initial confidence.
Despite the UK economy continuing performing strongly following its departure from the EU on the 31st January, tensions over sovereignty and regulatory alignment have led many political commentators to claim that the two sides are simply too far apart to negotiate a substantial new trade deal before 2021. Yet these concerns have been eclipsed recently by the worldwide spread of COVID-19 (i.e. coronavirus), leading to widespread border closures and population lock-downs which have disrupted global economic activity and supply chains. Events finally seem to be catching up with the financial markets, as global stocks (at the time of writing) have experienced their worst performance since the 2008 financial crash. The German DAX declined by 3.9%, the Dow Jones by 3.7% and the FTSE 100 by 3.4%.
Given these events, many financial advisers and investment managers are rightly issuing their messages of reassurance and advice to their clients. Yet in the midst of any market volatility, it’s important to remember this simple truth: investing is for the long-term, and investment decisions should be taken with this view in mind.
Predicting the unpredictable
You’d be hard-pressed to find anyone in 2019 who predicted that a globally-disruptive virus would break out in 2020, causing market dip and economic instability. Indeed, most concerns likely centred around the outcoming of Brexit negotiations and the U.S.-China trade war. The present situation serves as an important lesson to investors; no one can fully know what will happen in the markets, and building a long-term growth strategy based on anticipating events in the short-term (as active fund managers do) is likely to be unviable.
There is every possibility that COVID-19 will continue to spread across the world in the coming weeks and months, leading traders to constantly second-guess their portfolios. Given the likely market disruption this is likely to cause, isn’t it time for investors to abandon their equities and move everything over to cash, gold and fixed-income securities? Not so fast.
Embracing control, and the lack thereof
The temptation during turbulent times in the market is to try and do something. For some, the inclination will be to jump ship before things get any worse. Others might get aggressive and start buying up cheaper stocks as they fall, hoping for greater profits when the markets recover in future months/years. However, the key principle to embrace amidst all of the uncertainty is to rest in the things you can control, and try to “let go” of the things you cannot.
In 2020, for instance, investors cannot control how COVI-19 will spread, how governments will respond and how different sectors/industries ultimately will be affected. However, you can control how much you choose to save and invest, as well as how much investment risk you decide to take and what kind of costs you pay on your portfolio (e.g. taxes and investment management fees). Remember, also, the parts of your psyche as an investor which you can also exert considerable control over (especially with the help of a financial advise):
Loss aversion. People hate losing money, but remember that your investment losses are not actually crystallised until you sell them (no matter how far they might have dropped in value). Be careful not to “panic sell”, and consult your financial adviser.
Hindsight bias. Some investors have expected a bull market for many years, and the COVID-19 events might have vindicated many of them. This can cause investors to have greater confidence in their ability to predict the future, leading to foolish decisions.
Control illusion. The impulsive desire to act in the face of financial threads is deeply embedded, and it can make us feel more in control of the events around us. Yet such decisions are not always the wisest ones when it comes to our wealth and finances.
Keep the long-term in view
COVID-19 is testing the mettle of many investors, even those with considerable experience. Yet it’s vital to remember that investing is for the long-term. Try to cast your mind back to 2008-9, if you can, and recall the widespread investor pessimism following a 10-year bull run. In the ten years following the devastating financial crisis, the markets recovered and exceeded previous records. The FTSE 100, for instance, hit its all-time high of 7,903 points in May 2018, and from 2012-2019 the S&P 500 grew from about 1,200 points to over 3,200.
The key message? Bear markets and bull markets are part of the nature of the beast. Investing is never meant to be easy or pain-free. Rather, a financial adviser’s job is to sit down together and remind you that volatility is inevitable, and that your portfolio should be constructed with this principle in mind. Over the long-term, we can reasonably expect the markets to continue their historic trend towards growth; yet with bumps and dips along the way.
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