2020 will go down in history as the year the world change forever, the year that COVID-19 or the coronavirus caused a global health and economic crisis. In times like these it is important to remember that no matter how dark and bleak things seem to be right now, the world is not ending, this virus will not destroy us, and we will recover. Keep calm – don’t turn your paper loss into a real loss. Try to ignore the noise and focus on the facts, stay balanced and look at the good news and not just the bad. We are operating in a climate of imperfect information and therefore markets have become volatile and will remain that way until we start to see the virus get under control.
Anyone who sold ahead of this crisis is incredibly lucky. There was no way of knowing the severity and devastation that the coronavirus would cause, no one has a crystal ball. However, what we know is markets do recover. If we look back in time, the world has been through previous global health crises such as SARS, which is closely related to COVID-19 (it is the same species but a different strain of virus).
The following table shows the impact that past epidemics had on markets over 1 month, 3 months and 6 months. After an initial drop in the market as a result of the epidemics the investment markets increased in value at the below three measures. If an investor had reacted by selling in those times, they would have likely been worse off. Whilst the coronavirus is proving to be of bigger impact, it highlights the point of not panicking.
History has shown it is generally a bad decision to change your investment strategy amid a crisis. Instead it is important that we stay the course, don’t panic, don’t sell in falling markets and instead wait for markets to recover like they have done before.
Time to Reflect
In times like these it is important to understand and review the psychology of investing. As humans we tend to feel and remember losses twice as much as the gains. On 20th February, 2020 the Australian stock market reached its highest point in history. If you had invested your entire portfolio in February you would be feeling the maximum of the downturn, however for most of us that is not the case. A specific date, asset class or share is not what you should be focusing on. Your investments don’t just include shares. The reason we talk to you at length about diversification (i.e. not all your eggs in one basket) is because diversification and asset allocation matter greatly in times of a crash.
The below table shows examples of different returns for different asset allocations (risk profiles/ types of portfolios) over the last 15 months compared to that of the ASX 200 (Australia market) and the S&P 500 (USA market). As you can see, the different asset allocations fell different amounts depending on their exposure to the stock market (or percentage of funds invested in shares). You will also note that all of the funds fell less than the ASX or S&P. This is due to diversification. These funds are invested not just in the share market, but also cash, government and corporate bonds (fixed interest), infrastructure, property, Australian and international shares.
The returns are based on the market as at 27-03-2020.
If you invested $1 in May 1992, that investment has grown in value to $8.42 as of 24 March 2020, with 68 per cent of the increase coming from holding and reinvesting dividends. Over the last 15 months most investors are still in front even though there has been a considerable recent market loss. Markets will recover, there will be a bounce back and these numbers will improve with time.
The Government’s stimulus packages and RBA policies will help stabilise the economy in the medium term but for now we will continue to experience volatile markets in the short term. There is no point in making any predictions for the short term. We can however use these times as an investment opportunity as many companies are now trading at discounted rates. Active managers have been responding to this crisis and now more than ever are taking advantage of these lower prices. They are looking for companies with strong balance sheets and firms that have a competitive advantage, so that over the long term have the potential to perform strongly.
Moving Forward – Accumulators and Retiree’s
It is likely that things will get worse before they get better. To support you in preparing for the future, and giving thought to the potential challenges some of us will likely face, we have written the following article Step to Prepare and Protect Your Finances During the Coronavirus Recession which we suggest you read.
One of the key take outs from the article is that regardless of where the market is it’s important to maintain a ‘dollar cost averaging’ strategy. This stops us from trying to second guess the market and where it might be going in the short term. It gives us the discipline to keep buying even when doing so is hard.
No one knows what is going to happen over the coming weeks and months so it is difficult if not impossible to time the market or know how long these challenges (health and economic) will last. Further, the market will recover before the economy does as markets are forward looking, so the bounce back may come sooner then you think. We remain convinced that buying a diversified portfolio of quality companies, using dollar cost averaging and holding them for the long term, is the smartest investment strategy.
One of the best times to stay invested was at the end of the GFC in February 2009. Equity markets had fallen a lot and investors gained from continuing their regular savings plans, holding and reinvesting dividends back into their portfolios (i.e. buying more shares).
The consensus view (for now) is that the economic hit to Australia will be harder than a typical recession and may even look and feel like a depression, but the bounce back in economic activity will be quicker and more intense than the recovery post-World War II.
Regardless of what may lie ahead in the short term, the evidence from our history tells us that markets recover and so do we. Our society will rebuild anything that this virus tries to destroy, we will become stronger as a people and more resilient as a nation. In the post-pandemic world, businesses will recover, new ones will emerge, while some sadly may never return. The decade of the 2020’s will be an era of renewal and rebuilding of our great country, a possible return to manufacturing and the irrepressible roar of the Australian economy.
If you have any concerns, please get in contact. We are here to help.
Stay safe and wash your hands.
The Elliot Watson Financial Planning Team
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- 1.Keep Calm – Don’t Turn Your Paper Loss Into a Real Loss
- 2.Steps to Prepare and Protect Your Finances During the Coronavirus Recession
- 3.The Coronavirus – Open Letter from Elliot Watson Financial Planning
- 4.Is Your Industry Fund Superannuation Safe?
- 5.Bored in Iso? Give Yourself a Financial Health Check