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Let’s start by stating the obvious – the spread of Coronavirus around the world is a major cause for concern.  On a human level, a potential pandemic could lead to a devastating loss of life.  Whilst health issues are the main cause of concern, it is entirely understandable that investors may worry about the impact on their portfolios, particularly in the wake of the worst week for the FTSE 100 Index since the financial crisis of 2008.

Our immediate advice to clients is “DON’T PANIC”.  This may be easier said than done when portfolio values are falling, but it is nevertheless good advice.   We cannot rule out further market falls in the short term, but we remain confident that values will rebound over the medium to long term.  This is a view endorsed by many experts, with the Governor of the Bank of England reporting that Coronavirus could produce a large but ultimately temporary shock to the economy.

Despite the increase in volatility and the severity of recent stock market falls, there are a number of factors that we would remind clients of at this stage:

  • Volatility is a normal part of investing

From time to time, there is inevitably volatility in stock markets as investors react nervously to changes in the economic, political and corporate environment.  Above all else, financial markets dislike uncertainty.  Yet markets are also prone to overreact at events that cloud the short term outlook.  As an investor, it is important to take a step back at these times and keep an open mindset.

  • Market corrections can create attractive opportunities

 A stock market correction can be a good time to invest in equities as valuations become more attractive, giving investors the potential to generate above-average returns when the market rebounds.  Some of the worst historical short-term market losses were followed by strong recoveries.

  • Avoid stopping and starting investments

Those who remain invested, typically benefit from the long-term uptrend in stock markets.  When investors try to time the market and stop and start their investments, they run the risk of denting future returns by missing the best recovery days in the market and the most attractive buying opportunities that become available during periods of pessimism.  Missing out on just five of the best recovery days in the market can have a significant impact on longer term returns.  For example, between 1993 and the end of 2019, the S&P 500 Index provided a total return of 1170%.  Missing the five best days during that period would reduce the return to just 742%.  To look at this another way, missing the five best days over the past 27 years would reduce the average annual return from 9.9% per annum to 8.2% per annum.  Missing the best 30 days has an even greater impact, with the total return reducing to only 159% or 3.6% per annum.  Selling as a result of a market correction increases the chances of missing out on the best days and this could have a disproportionate effect on long term investment returns.

  • Active investments can be a very successful strategy

During periods of increased volatility, the flexibility of active investing can be especially rewarding compared to the rigid allocations of passive investments.  In particular, volatility can introduce opportunities for active fund managers especially during times of market dislocation.  Although we sometimes use passive investments in client portfolios, we tend to favour active managers with good long-term track records of generating above average returns.  We expect highly skilled fund managers to be able to take advantage of current market conditions to deliver out-performance compared to their peers.

Where any long term investment strategy is concerned, it is important to remain invested during the bad times so as not to risk missing out on the good times when they return.  Unfortunately, we cannot predict how severe the economic shock from Coronavirus will be, or when this will come to an end.  We therefore understand that this could be a worrying period for some investors, however the US Federal Reserve has already cut interest rates and other central banks are expected to follow suit in implementing similar stimulus measures. This should serve as reassurance for the market and could even lead to higher global growth than might otherwise have been case, once the short-term effects of Coronavirus subside.

Coronavirus is certainly a worrying issue, but we feel that any negative impact on the global economy will be relatively short-lived.  We are not alone in holding that view, with many of the world’s most successful investors indicating that the recent market sell off represents an opportunity to buy shares cheaply.  For clients that are already fully invested in long term strategies, our advice is to sit tight with the expectation that volatility will eventually reduce and portfolio values will recover.

3rd March 2020

 

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This post was written by The Vintage Team