If you have long term pensions or investments that are related in anyway to the stock market, it is likely that you have seen the value drop in the last few weeks. We wanted to write this document to help our clients and others invested in the markets understand why this is happening, what action to take and more importantly what NOT to do.
Whilst the human cost of Corona Virus is of course tragic, it also carries an economic cost, the main cost impacting the travel sector and certain geographical areas. Where one industry loses, another gains, mass panic buying will boost the profits of certain companies.
Why is my investment value falling?
The markets do not like uncertainty, and if there is one thing we have right now, it is uncertainty. Also, in the 24-hour news and social media world we now live in headlines are causing panic, some of it unfounded. The market has largely taken a tumble due to a lot of uncertainty and the potential of worst-case scenarios. The truth is nobody knows exactly what is going to happen.
When it comes to the Corona Virus there seem to be three views:
Optimists – It won’t catch me, it’s all hype, it will blow over etc. I am ignoring all news and carrying on life as normal. I am going to put more in the markets to capture the upside when the markets recover.
Realists – It’s real, it is affecting a small percentage and fatal to an even smaller percentage. I will watch with interest and receive my news from reliable sources. I may increase my handwashing regime a little. I am concerned that my investment values are falling, but am comfortable leaving them as they are. I am more worried if this is going to affect my upcoming summer holiday.
Pessimists – The world is going to end; this is serious and like nothing we have ever seen before. I am going to bulk buy toilet paper and hand sanitizer and be glued to 24-hour news so I am well informed. I am going to remove all of my money from the markets, I know this means I will lose out and definitely make a loss, but the world is going to end anyway so I might as well spend it now.
As a firm we sit somewhere between the Realist and Optimist categories, but we are only human and all of us get sucked into the Pessimism every now and then. It’s important to try not to stay there for too long. Doom and gloom is great for headlines, sells papers or in our more modern world provides click bait. This is how these media companies make their money, please be mindful of that when reading any news.
What action should I take?
If you are a client of ours you will have already been informed by your adviser at your initial meetings and annual reviews that markets will go up and down. You are reminded that when events like this happen not to panic. We ensure that all our clients are in portfolios that are very well spread geographically, have a range of asset classes and that can be changed easily and without penalty, if that is the right thing to do. We also offer cashflow planning which can show the impact of a market crash and how this will impact your long-term goals.
Our advice to all clients is to remain invested. We are however monitoring the situation carefully and will be updating clients if our advice changes, which is very very unlikely.
If our clients are saving monthly or yearly, we are recommending that they continue with that plan. If clients are making planned regular or lump sum withdrawals, they should continue with that plan too.
If you are in an actively managed fund your fund manager will be making changes to your portfolio, taking opportunities when prices of good stocks and funds are low. They will be making sure the asset mix is still in line with the risk tolerance originally chosen.
What NOT to do:
Don’t panic and reduce your risk if this is not in line with your plan. Trust your adviser and if you don’t have one, now would be a great time to get one, ideally choose an Independent Advice firm with experience of previous market crashes.
Ignore dramatic headlines such as ‘billions wiped off pension funds’. They do not often report when the markets have recovered plus growth. That would be a less dramatic headline and not good for profits.
Don’t check your portfolio every day. If you pay an adviser and fund manager, they are doing this for you, it will only cause panic.
Don’t be afraid of contacting your adviser. they are expecting your call and will be prepared with advice to help alleviate your fears and ensure you stay on track.
In the last 5 years alone we have experienced Brexit, Trump Vs China and now Corona Virus. These have all impacted the markets and even the most cautious portfolios are still in profit. Not only that they have significantly outperformed any deposit-based accounts that continue to pay very small rates of interest.
Worldwide stock market values go up and down every day and are largely based on the values of companies. A company’s value is affected by several things including what might happen in the future. The Coronavirus gives us a lot of unknowns for the future, meaning that the level of profits a company will make are unknown. The truth is the level of profits a company will make are always unknown, so investing in companies always carries some risk, but history shows us that investing in companies tends to be quite lucrative, which is why billions of people invest in the stock market, a market that has outperformed all other asset classes throughout history.
An Investment Portfolio is usually made up of hundreds, sometimes thousands of company shares which reduces the risk of being invested in just one company.
Events like this highlight the importance of diversification. There are several ways that you can diversify an investment portfolio and we advocate good geographical and sector diversification. Ensuring that you are not over invested in any one country or business area. Before the 2008 financial crash a lot of portfolios were over invested in financials because the banks were solid as a rock, consistently profitable, and could never fail… We all know what happened there. You will now find that most advised portfolios are incredibly well spread. The truth is no one knows which country or sector is going to be the next best or worst performer. It isn’t all a guessing game, expert fund managers scrutinise company accounts to identify those at more risk of failing and those with the best chance of success. They largely make the right calls, but occasionally get it wrong, which is why it is also wise to diversify across a range of funds and fund managers.
In actively managed portfolios, these periods of market stress provide excellent opportunities for fund managers to purchase good quality investments at much lower prices.
As a firm we are actively monitoring the real information that is available from reliable sources. We are ignoring sensationalist headlines and social media ‘stories’. If we feel there are changes to be made to your portfolio, we will be in touch either by email or phone to let you know what the plan is. Taking advice from many fund managers and investment specialists our current stance is to remain invested.
During times like this we offer our clients complimentary comfort calls. If you feel you would like to speak to an adviser, please get in touch and we will pencil in a comfort call for you. If you do not have an adviser or are looking for a change then please contact us for a complimentary consultation.
Independent Financial Adviser and Managing Director – Northfield Wealth Ltd