At times like this, it is sometimes worth reminding ourselves that it is this very uncertainty of shorter-term market outcomes that delivers investors with returns above those of placing bank deposits.
This allows us to grow our purchasing power over time. In the case of equities, this uncertainty can be high as the market adjusts its view of long-term earnings and the discount rate it uses to establish market prices. If there was no uncertainty, then there would be no equity premium.
In contrast to the recent sensationalist headlines, such as the BBC’s ‘Coronavirus fears wipe £200 billion off UK firm’s value’ the never-published headline of ‘Over the past 10 years global equity markets have turned £100 into £266, so giving a bit back is perhaps to be expected’1 provides some comfort to those already invested. Good news does not sell as well as bad news!
Is the Coronavirus market impact different?
You may be asking yourself whether this health-driven market event is different to those that have gone before. It is, but only because every market fall is driven by a different combination of events that impact on future corporate earnings. What should remain the same is your response to it: avoid panic, avoid unnecessary emotionally driven investment activity, believe in your portfolio and the power of markets and capitalism to recover in time.
10 things to remember during market falls.
- Embrace the uncertainty of markets – that’s what delivers you with strong, long-term returns. Remember that you most likely own bonds in your portfolio too. Your portfolio won’t be down as much as the headlines.
- Don’t measure your portfolio’s performance from the top of the market, but over a longer and more sensible timeframe.
- Don’t look at your portfolio too often. Get on with more important things. Once a year is more than enough. If you are looking every day, then have a word with yourself. If you are worried about Press coverage of the market fall, be more selective about what you listen to.
- Accept that you cannot time when to be in and out of markets – it is simply not possible. Resign yourself to the fact. Hindsight prophecies – ‘I knew the market was going to crash’ – are not allowed.
- If markets have fallen, remember that you still own everything you did before (the same number of shares in the same companies, and the same bond holdings).
- Most crucially, a fall does not turn into a loss unless you sell your investments at the wrong time. If you don’t need the money, why would you sell? Falls in the markets and recoveries to previous highs are likely to sit well inside your long-term investment horizon i.e. when you need your money.
- The balance between your growth (equity) assets and defensive (high quality bond) assets was established to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially.
- Be confident that your (boring) defensive assets will come into their own, protecting your portfolio from some of the equity market falls. Be confident that you have many investment eggs held in different baskets.
- If you are taking an income from your portfolio, remember that if equities have fallen in value, it may be sensible for us to agree to take income from your bonds. Therefore not selling equities when they are down.
- We are here – at any time – to talk to you. We will act as your behavioural coach to urge you to stay the course. We are a source of fortitude, patience and discipline. We may advise you to sell bonds and buy equities, just when you feel like doing just the opposite. Be strong and heed our advice.
The Paradigm Norton team are here to help. If you have any questions or concerns about your wealth and investment portfolio during this uncertain time, we encourage you to get in touch, You can call the team or speak to your existing adviser.
Bristol: 01275 370 670 London: 020 7269 7960 Torquay: 01803 618 318
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. The value of investments can go up as well as down and cannot be guaranteed