On Monday I had a phone call from one of my clients, “Mathew, I would like to cancel our appointment next week as I am concerned with the Corona Virus and the effect on the market”. What is the concern I asked, “Well the markets are down at the moment and I think it might be best if we come together when the markets have picked up”. My reply was I am a bit confused when we met you stated that you wanted to invest for the future and not tomorrow, the future then was over 10 years, what has changed? Nothing has changed it remains the same was her reply. I then asked if you want to buy a property and you were told that the price had gone down would you rather buy now or wait for tomorrow when the price has gone up. I think we can all guess what her answer was.
Is the World coming to an end?
The headlines on news channels or print media today sounds like a scene from a Hollywood movie like “I am Legend” “Out Break” and one of my favorites “12 Monkeys” and the markets have reacted with a sharp decline in the FTSE100 and other world markets.
In situations like this it is it is usual for investors to have knee jerk reactions to the disturbing headline news diverting from their attention the long-term investment goals. Let’s not forget we have been here before with Swine Flu, SARS and Ebola. Although it has spread quicker than any other virus, the fatality rate of COVID-19 is lower than other deadly virus.
Source: Data from the CDC and WH
Previous epidemics have had similar effects to the markets, however if you look at market returns after epidemic outbreak, the long-term picture is positive.
As depicted, market participants tend to react to such unforeseen outbreaks, but markets tend to recover by the six-month mark. This suggests that sentiment drives early losses, but sustained economic impacts are less than perhaps investors feared at the onset. (source Morningstar).
Warren Buffett, chairman and CEO of Berkshire Hathaway, said “you don’t buy or sell a business based on today’s headlines. If (the market) gives you a chance to buy something you like and you can buy it even cheaper, then it’s your good luck.
So, what should Investors do?
The short answer remember your long-term investment goal. In my previous article I wrote about the difficulties of managing my clients’ emotions so they can separate them from investing and look beyond the news headlines in order to focus on what they can control. It can take some time for clients to ignore the media noise and focus on their individual needs and goals. Especially when markets are dropping (a bear market) or when they are rising (a bull market) people can become emotional and can exhibit behavior that ends up derailing them from pursuing their long-term goals and ideal outcomes.
Diversification in asset classes is also a key recommendation in investments in a week where we have seen a sharp decline in equity markets, Bond investments serves as a haven to limit the risk in a falling equity market. Diversification can be very valuable in helping you re-balance your investment portfolios or take advantage of market opportunities as stock prices drop.
In the last week total bond market indexes gained around 1.2%, and short-term bond indexes gained about 0.9%. High-yield indexes sold off about 2%, reflecting concerns about economic growth. (Source Russel Kinnel Morningstar Investments).
Research by Goldman Sachs has found that although stocks drop at the start of an outbreak, the markets tend to rebound with the market being up almost 10% on average six months after the outbreak is announced.
At Oakwood Financial Services we believe the most important thing when investing is having a clear long term objective and investing in a diversified portfolio, balancing risk versus reward.
By Mathew Agbame