We currently experience very particular times at all levels. Our lives are, for the moment at least, drastically adapted to stop the spread of Covid-19. In addition to all the practical changes that are impacting our daily lives, some of us have already noticed an equally severe consequence. As I am writing this, financial markets experience the worst fall since the Black Monday in 1987.
How should one react seeing the ongoing performance of their investments? The solution is to react the same way as we should do in our daily lives: by avoiding panicking!
It should first be noted that in the short-term, financial markets are unpredictable. They show a high volatility and this volatility booms during crises, as it does now. Assets have lost 10 to 20% of their value and everybody starts panicking. As one’s fear of losing even more money could take control, some people will start selling their stocks. If there are more sellers than buyers for a specific stock (which is likely in these uncertain times), the price will continue dropping in a waterfall effect. So why not just selling out stocks before it’s too late?
As mentioned above, it is wise not to let panic take over. Losers are the ones who sell their assets now, for your loss is only virtual if you keep your assets for the time being. The stock market should be looked at long-term. “Any financial plan or strategy that was created and didn’t account for a potential 20% drop in the markets was not one that was going to succeed over the long term” says Kevin Barlow, the managing director of a Los Angeles-based investment advisory firm.
Therefore, aim to stay strong and carry on. Experts’ opinions vary regarding how long the recession will last for. One says that an event-driven bear market - such as the one happening now - tends to recover all its losses in 15 months. Another expert guesses the financial harm done by the Covid-19 outbreak won’t be done soon and there is more downside to be expected. No matter how long this goes for, the golden rule remains the same: don’t flip the boat!
Indeed, prices will rise again in the long-term. Rather than selling out your assets, one could use the Covid-19 crisis as an opportunity to invest and benefit from the low market prices. As can be seen from the market cycles below, the bear market and the emotions of fear and panic we currently experience constitute the greatest investment opportunity and the lowest risk simultaneously. If you intend to do so, make sure you do it with a long-term focus, to diversify your portfolio and refrain from panicking.
As mentioned above, as we never quite know how long the crisis will last for, you can invest according to a dollar-cost averaging strategy. This method consists in dividing the total investment across periodic purchases to reduce the impact of volatility on the overall investment.
Know your risk profile and invest accordingly. If you can’t sleep at night, you might have taken too much risk in designing your portfolio. To make the next crisis more bearable, you might want to diversify it by investing more in gold and sovereign bonds as including these will dampen your overall portfolio volatility.
For now, turn off the financial market news and be cool-headed.
Spend quality time with your family or housemates and stay safe.
The sun (and financial markets) will rise again tomorrow