In talking to our clients there is confusion and concern in some about “should I be changing my plan?” This is prompted by:

  1. The fact that people are exposed to an enormous amount of news and media about the investment markets and the economy.
  2. They have time to think about this as we are in isolation, it is also normal in periods of volatility that people question their plan and feel that this time is different and hence needs action.
  3. At this stage of the downturn you can definitely form the view that the markets are scary and further volatility is likely.

Now this is not all clients but some, enough to post this update.
I have retained parts of our previous blog below as its information remains relevant and correct.

 

I urge all investors and our clients to consider the following question:
“Do you need to access your money in the near future, say the next 1-5 years, or will it remain invested for the longer term”.

If you have a longer time frame then conventional wisdom says:

  • Cycles, downturns, recessions happen.
  • The evidence shows that remaining invested is the wisest way to react and recoup your losses already made.
  • If you sell out of your investments now you make your financial loss real.
  • It is unlikely that you will succeed in trying to time the market i.e. moving out then back in.

For those that need access to their money in the short term a discussion with your financial adviser is needed to assess whether a change is justified.

  • Any good plan would already have catered for any liquidity need and hence you should fall into the long term category with your growth investments.
  • Have your circumstances dramatically changed? I have only seen 1 client to date whose circumstances have changed enough for him to consider a change.

 

This is NOT just my opinion but the opinion of many knowledgeable investment and financial advisers and research institutions.

 

Here are some external opinions on my thoughts above:
These Morningstar videos illustrate promote:

  1. Keeping your emotions in check
  2. Using volatility to review your Risk Tolerance
  3. Not trying to time the markets.

https://www.morningstar.co.uk/uk/news/200475/3-tips-for-worried-investors.aspx
A more detailed look at NOT trying to time the markets
https://www.morningstar.co.uk/uk/news/200944/why-you-cant-time-the-market.aspx

3 reasons to not sell after a market downturn:
https://www.investopedia.com/articles/investing/021116/3-reasons-not-sell-after-market-downturn.asp

 

So yes these are unprecedented times but whilst that is true they do resemble in many ways previous events in history, it is normal that events feel worse at the time and that emotions take over the rational mind.

So, it’s really important during periods of market volatility that you don’t overreact, that you don’t sell out your investment at the bottom. Historically that’s the worst thing that people can do.

Research shows that those who sell out at the bottom and then buy back in, say, a year later when they feel more comfortable, do much worse than those who stay invested. The following graph illustrates this:

 

The right answer for you depends on your circumstances but generally for long term investors the above will apply.
Seek advice about your specific scenario if you are unsure or feeling uneasy.

Governments around the world and particularly in Australia have taken quick, strong and targeted action and overall they they should be commended.
Experts highlight that these actions are a key difference to the 1930’s depression where governments did not act immediately and consumption stopped.
In my recent discussions with Morningstar their perception of what is happening in the market,

  • They see markets and spending returning to normal in the future,
  • The next 2 -3 quarters will have further volatility and downward corrections are possible even probable,
  • They believe the government has acted quickly and taken the right actions to keep the economy moving but this crisis will take time to beat, perhaps 12 months before the positive signs starts.

Now they do not have crystal ball and this is just an educated opinion, but they do have a tremendous amount of data, experts and experience at their disposal.

So consider all of the above information and we urge you to never act without specific advice from your adviser. For long term investors staying the course is likely to serve you best.

Here are some interesting observations and comments about irrational and/or emotional investor behaviour:

  • It’s a funny thing that in the share market, people actually want more of something when the price goes up, and less when the price goes down. The opposite is needed!
  • While it is easy for investors to react to alarming headlines and panic when events such as this outbreak occur, a more measured approach is sensible. This pandemic can impact the assets in which we invest but it is important to separate permanent damage which will impact the long-term fair value of an asset from temporary damage which will be forgotten.
  • There has been indiscriminate selling across all equity markets, many global sectors losing value regardless of their underlying investment merits. Valuation-driven investors see this as an opportunity to buy assets that are now cheaper than they have been or should be! Market volatility may continue for some time, but if you believe these are short-term market events then you should be on the lookout to buy unloved assets that have attractive long-term expected returns.
  • Experts like Morningstar expect their portfolios to perform well once the market begins to focus on fundamentals.

I think at times like this you should consider the following:

  1. Try not to time the markets i.e. think you can pick the bottom and also when to buy back in. You will likely miss a large part of the rebound.
  2. Rely on professional managers not your gut, historical results and well intentioned advice from peers. No share, not even the CBA is guaranteed to always go up and it may not be the best performers!
  3. When you sell at a loss you make that loss real, history tells us that markets will restore and rebound.

Please call if you would like to discuss. Adrian

 

GRAPH: Data as of 12/31/2017. Past performance is no guarantee of future results.  Hypothetical value of $1 invested at the beginning of 2007. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. ©2017 Morningstar. All Rights Reserved. About the data: Recession data is from the National Bureau of Economic Research (NBER). The market is represented by the Ibbotson® Large Company Stock Index. Cash is represented by the 30-day U.S. Treasury bill. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for taxes or transaction costs.

General Advice warning: the information in this article is general in nature, it is not advice specific to your needs. If you want to act upon the information in this article then you should seek advice from a qualified professional. VJC WM accepts no liability to any party for acting from this information unless they have sought advice in a formal engagement with VJC WM for this purpose.