As the macro-economic fallout of COVID-19 becomes increasingly apparent, global investment markets are reeling. Many commentators would argue that asset prices, in particular equities, were due a correction following an elongated bull market dating back to the Credit Crunch. However, the severity of this sell-off is as unprecedented as it is impossible to forecast, understandably leaving investors feeling battered and bruised.
It’s at times like this that measured, professional advice is vital to help clients navigate the emotional rollercoaster that invariably follows from highly volatile and downward trending stock markets. Invested wealth will generally be taking a cruel haircut, compounding a tough time for families simultaneously adjusting to the professional and human consequences of the pandemic.
Many companies will fail or survive purely on exceptional government bail-outs that will impact balance sheets and earnings for years to come, but as many will adapt and emerge prosperously in the new world. That is the proven capitalist way and human beings have a remarkable habit of adapting and evolving to crises and coming out on top. Things are bad, but not insurmountable.
With all this mind, I wanted to share some common sense advice that I will be delivering repeatedly at Enhance in the weeks and months ahead as the COVID-19 story plays out. These aren’t investment ‘top tips’ to profit from the crisis, rather basic strategies for long term investors to employ to help preserve their wealth and come out the other side of the pandemic in a strong position.
Panic at your peril
The worst reaction that investors can have to a crisis is panic. Most families will have reasonably well diversified portfolios designed to account for their risk appetite and long-term objectives. Whilst risk appetite will be tested to its absolute limit, in most cases long term investment objectives will not change due to the pandemic. Outside of professionally advised tactical investment decisions, families should not consider trading their portfolios and instead stay calm, keep faith in their investment strategy and ride out the storm. It may take time, but the world will recover and so will your portfolio.
Cut your cloth accordingly
A sure-fire way to destroy long term capital value is to lose your nerve and sell in volatile stock markets following a significant drawdown, particularly if liquidating to fund avoidable personal expenditure. As an example, panic selling around half of your assets following a 35% drawdown means that remaining invested capital will need to treble in value to reach parity with your pre-crisis portfolio’s valuation. This materially pushes out your time horizon for, and the likelihood of, a full recovery and can be avoided if short to medium term expenditure is moderated or sourced from another aspect of your overall wealth.
Out of adversity comes opportunity
It is impossible to consistently time investment markets, but one can take a pragmatic view. If you have cash reserves available that do not have a short or medium term purpose, sharp sell-offs can provide an attractive opportunity to top-up an investment portfolio at a discount that previously was not available. A sensible tactic is to ‘pound cost average’, deploying cash in stages over a period of time following the initial steep sell-off. This is a lower risk approach than trying to time the bottom of the market and should secure a discounted aggregate entry point for cash reserves versus pre-crisis levels.
- Invest in a chair, not a pogo stick
Whilst asset allocation methodologies are the subject of ongoing academic and industry refinement, in times of crisis it becomes painfully clear that even basic diversification across asset classes provides investors with protection. Investing in one asset class, or sitting on a pogo stick, is a precarious position to be in, whereas having exposure to multiple asset classes, or sitting on a chair, is far more stable and less prone to topple over. Some diversified portfolios will fare better than others in a downturn, but almost all deliver better results than equity markets.
There are, of course, many other pieces of strategic and tactical advice one could provide to investors amidst black swan events, but these four principles are generally applicable to anyone wishing to protect their wealth during major downturns. Cool heads prevail and often the best short-term advice is to do nothing if the long-term advice remains sound.
The pro-activity most clients will require in the weeks and months ahead is simple communication rather than complicated solutions.
Keep safe and well, but please also...