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A pandemic of fear

In the last few days, global stock markets appear to have been reacting to the Coronavirus outbreak. The international escalation of the Coronavirus has led to global stock markets taking a tumble. The graph below shows the behaviour of global stock markets over the last 6 months.

Why has the market suddenly moved like this? The honest answer is that no-one knows. Is the virus going to affect global economic output this much? More? Less? Again, no-one knows. It may be that the fear of what may be has caused an overreaction.

The real question is, what can we do about this? Unfortunately the answer is nothing. We have no way of knowing if the fall will continue or if markets will rally and recover (possibly rapidly). However, I do have a few points that may help…

  • If your goals haven’t changed, neither will your investment strategy. When we design our clients investment strategies we design them to be successful over the long-term. This naturally factors in good and bad periods of time. We also model the effect of large drops in the stock market on our clients financial futures to stress test the plan. Focus on the long-term
  • Your portfolio is diversified. When you read about how much the markets have dropped, that isn’t your portfolio. Our clients have globally diversified portfolios that include exposure to bonds as well as global stock markets. It’s at times like these that the defensive bond holdings reduce the impact of stock market falls.
  • Reacting after a drop can be disastrous. These drops are impossible to predict, but if you react after the drop, you turn a paper drop into a real loss. Various studies have shown this to be one of the biggest destroyers of returns for investors.
  • This is normal. It feels horrible, I feel it too! Unfortunately it’s part of investing. In order to get a long-term return in investing, you have to take risk. Part of that risk is being able to stomach the short term dips.

As a final reminder, the below chart shows the 10 year graphical returns of those same markets shown above, but starting from 1 January 2008. Why then? This was the year of the credit crisis. The short term returns were awful, but the long-term returns were good. There is never any guarantees with stock markets, but I have confidence that, although stock markets can be rocky in the short term, they are generally resilient over the long-term.

Hopefully this has helped you understand what’s going on a little more. Please be assured that if you are worried, I am happy to have a chat.