We are witnessing an increase in volatility in financial markets over recent weeks, due in main to the outbreak of the coronavirus, and we are receiving questions about what people should do when markets start moving more erratically. So, we have written this article to address this question.
What is happening?
The biggest news of the last few weeks has been the spread of the coronavirus across much of the world, Europe included. Uncertainty around how contagious the virus may be, the rate of infections, the severity of the virus and the rate of spread has caused concerns in the financial markets. This has resulted in some stock markets going down in recent weeks, as well as oil price reducing and gold prices rising.
How does this impact you and your investments?
The answer to this question is that it depends on what assets you are holding and how long you intend to hold these investments. If your outlook is long-term the impact may be minimal.
What to do:
Avoid sensationalist media: many news sources love to make things more dramatic than they are. It is true the markets are down in the last two weeks, but they have been before, and like before, they will inevitably go up as well, over time. The long-term trend is markets do tend to go up over time, just not in a straight line. A good example this week was an article that stated the Eurostoxx 600 index, a measure of European stock markets, had incurred its worst week since July last year. That means, for some perspective, that last July was worse! And I am sure most people do not remember that.
Be clear on your objectives: If you need access to your funds in the short term, then preservation is more important, and you should probably not be exposed to market movements. If your objectives are long-term, it is often wise to stick to your plan and not make rash changes. We have written about this previously, and it is a timely reminder that is virtually impossible to time the market. We believe in sticking to investment principles and that you cannot consistently time the market optimally. Research has shown that just by missing out on the best 5 days in the market between 1980 and 2019 could mean a 35% lower result¹! If you are planning to exit the market on a downturn and enter when you think the recovery is about to start, you will probably not be able to time it right. We don’t try to do that ourselves. A commonly made statement is that it is time in the market not timing of the market that creates wealth. With best intentions it is virtually impossible to time your re-entry to markets.
In our article on Behavioural Economics here – our emotions influence our investment decisions and market volatility can influence our decisions.
As we said in that article don’t follow the emotional investment cycle:
Are there opportunities?
Yes. Not all investments move the same way when markets move- up or down. In the current environment some sectors like the travel industry and airlines can be expected to be hit harder. Conversely, some industries can be considered counter-cyclical, meaning they may increase in value in this downturn. Firms in consumer goods, health care and medical supplies are expected to increase in value over this period due to the higher demand for their products.
There is another opportunity, that exists for clients that are investing regularly. If you are adding to an investment every month or quarter, when the markets go down in value, you are in effect buying at a discount and getting more value for money.
The benefits of Diversification
By being diversified, meaning having your investments actively managed across asset classes, markets, geographies, currencies, types of underlying investments etc, can reduce your exposure to the risk of market downturns such as the events in relation to the coronavirus outbreak. By not putting all your eggs in one basket, while some parts of your investment may be affected, there should be other parts of your investment that may not be impacted, or that may increase in value. This all leads to a steadier return over time, helping you to achieve your long-term objectives.
Our investment philosophy is dynamic investment management incorporating client goals, risk profiles, duration, any other relevant external factors and then adjusting appropriately across market cycles. But we do not recommend jumping in and out trying to time markets. We collaborate with particular specialist managers that alter the asset mix in an investment portfolio to generate steadier lower volatility returns, in line with targets and minimising the risks that behavioural economics describe.
In summary, a large part of our value add to our international clients is to keep you on track, aligning your investments to your goals and ensuring your investments can work for you across all market cycles.