For several weeks the world and the markets have been in the grip of uncertainty created by the spread of coronavirus. This is, first and foremost, a public health crisis, and the precautionary measures being taken are a matter for the relevant authorities. As for savings and investments, though, market operators have a level of responsibility regarding the concerns of their investors.
Moneyfarm’s strategy is based on having a long term outlook. Unsurprisingly, then, our advice is that investors should avoid panicking and reacting on impulse. Investors need to keep in mind their broad investment goals and time horizons. Of course, every individual is unique (risk tolerance, balance sheet, etc.) and everyone, particularly in situations like this, has their own behavioural traits (or biases). Therefore, it is all the more necessary to avoid acting alone and make use of investment consultants where possible.Get in touch with a Moneyfarm consultant
The cost of a bad decision
To assess the impact of poor decisions, or poor timing, on an individual’s investments, we compared the performance of two identical portfolios managed by investors with different behaviours.
The orange line represents the portfolio growth of an investor who pulled their investments out as a reaction to the four main market declines over the past ten years, to invest back in once the recovery had begun. The blue line represents the portfolio growth of an investor who did not disinvest, choosing instead to weather the storm.
As you can see from the simulation, missing the periods of recovery that tend to come after dips in the market had significant implications, leading to a 35% lower return over the ten year period. There was no tangible benefit to avoiding the losses in the short term; leaving the markets as a reaction to turbulence meant losing around 60% of the growth in the portfolio.
Missing periods of recovery in the markets can be an expensive mistake for those who invest with a long-term horizon. Unless you can time your re-entry into the markets perfectly, it has been shown that those who stay invested are rewarded for their confidence. ‘Timing the markets’ is something not even top financial experts can do with any degree of confidence – markets are difficult to predict and the vast majority of investors do not have the time or the requisite tools to effectively invest independently.
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Once the worst of the public health crisis is behind us, a clearer picture will take shape and a more detailed assessment of the economic situation will take place. This will serve to assuage some of the uncertainty affecting the markets. After that, there will almost certainly be a recovery, which could take place over an extremely short period of time (a few months).
Missing the recovery in the markets can create long-term investment problems that are more serious than the decline in equity that we have seen in recent days. This is a key concept that should steer investor’s choices in this period of uncertainty – it also informs our analysis. The time will come when opportunities to increase exposures on various asset classes will arise, including volatile ones like equities. Taking these opportunities is, to us, just as important as managing risk in the short term.
The Moneyfarm Investment Committee is monitoring the evolution of the situation on a daily basis. We believe that, so long as there is no clear timescale of the impact on public health posed by COVID-19 and the response from political groups remains disjointed, there may be room for further falls.
In the short term, we have carried out some tactical interventions to mitigate the effect of the volatility on our portfolios. The changes have come in two key areas. For one, we have reduced our exposure in global high yield, where we have some concerns that the pressure on these types of businesses could increase in the current environment. Secondly, we have reduced some equity exposure in order to manage the overall risk profile of our portfolios.
This is not to say that we will not make further interventions, in one direction or the other, to further manage risk or to take advantage of any opportunities that may arise in the coming weeks.
It is never nice to experience volatility in your investment portfolio. In times like these, though, attempting to game the market is a recipe for expensive mistakes. Try to take a long-term view even in periods of uncertainty – you might just see greater returns.