Investors are reacting to the growing threat of a coronavirus pandemic, with a sixth consecutive day of stock market declines.
Indices in the US and Europe are now 10% off their recent highs, with a market correction which could lead to a bear market.
In the US, markets experienced their worst week since the global financial crisis of 2008.
You will see newspaper headlines referring to the billions wiped off the stock market. This is not a drill.
It’s OK, as an investor, to feel a little unsettled when this happens.
Reassuring words about how market corrections like this are part of the normal investing cycle probably do little to ease that feeling of discomfort.
Here’s what we know.
The virus outbreak started in China. It’s spread quickly to nearly every country in the world since then.
There’s already a considerable amount of economic disruption. Travel restrictions, the closure of schools and hotels, and enforced isolation mean a manufacturing slowdown in China – at a time when economic growth was already slowing.
We’re now hearing from economists about the possible ramifications of the virus spreading; in the US, a former Fed chair said it could result in a recession this year.
Here’s why that outcome wouldn’t be too much of a surprise.
We’re long overdue a global recession. Looking at the normal economic cycle of growth and recession, it’s now years past the point when a downturn could be reasonably expected.
That global growth has been sustained for so long is mostly thanks to central bank intervention and significant monetary easing.
What coronavirus might result in is an acceleration and deepening of that already inevitable recession. When combined with the artificial economic inflation of quantitative easing, it’s fair to say we’re in uncharted territory.
But what could this mean for your investments?
It’s slightly trite for a Financial Planner to pop up at times like this and say DON’T PANIC!
Our clients at Informed Choice benefit from a few factors which should, when considered rationally, reduce the tendency to panic.
Firstly, we recommend well-diversified investment portfolios. The sort of market movement highlighted above is unlikely to be seen in your investment portfolio, which features a mix of asset classes.
In diversification, we look for non-correlated investments; that is, investment types which tend to perform differently under the same circumstances.
For example, when stocks fall, bonds usually rise, as investors flee to safety.
There’s a worrying trend in some Financial Planning circles to dismiss the value of diversification, piling investors into equities with academic research showing this is where the best long-term returns will be enjoyed.
Yes, but you only get to enjoy the benefit of an equity portfolio if you can stomach the short-term volatility that comes along regularly.
Regardless of how great a behavioural coach we believe we are as Financial Planners, a high volatility portfolio will inevitably have a higher disinvestment rate than a diversified portfolio with smoother volatility. When that happens, you lose as an investor.
Secondly, we link all investment decisions to Financial Planning goals. This means we only recommend investments to achieve long-term financial goals.
Linking investment recommendations to Financial Planning objectives means you’re not investing for the short-term.
It’s never nice to experience a market correction, but these typically short-term events are of little significance when viewed through a long-term lens.
Thirdly, we make sure our clients have sufficient capacity to tolerate the risk of investing. If you don’t have a suitable level of risk tolerance, risk capacity, and need to take a risk to achieve your goals, we will not have recommended you invest in the first place.
These three factors should, I hope, dull that sense of dread as news outlets enjoy sensationalising the market impact of coronavirus.
But you’re still allowed to feel unsettled. We’re only human, after all.
And when you’re feeling unsettled by this sort of news, that’s the time to pick up the phone and speak to your Financial Planner at Informed Choice.
