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 statement and information is true, talk to us about your specific scenario if you are unsure or feeling uneasy.
Recession or depression
Currently the government has taken quick, strong and targeted action and overall they are to be commended on their fiscal stimulus.
Is this recession heading towards a depression?
At the moment experts say we are not heading towards depression, one difference to the 1930’s event is that back then the governments did not act immediately and consumption stopped. Currently here and around the world
- Governments are injecting money into businesses to save jobs and promote consumption, they are stimulating the economy.
- The central banks creating liquidity in the markets buying bonds, policies to assist borrowing and investment are in play already.
I spoke to Morningstar today to get 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.
The Morningstar SMA many of our clients are invested in has performed 2 to 3 times better than the ASX200 or All Ordinaries index.
This is pleasing but it is important to look at why:
- They saw the market was overpriced in the past year or more, they saw no value and stopped buying shares i.e. they sold high when others were greedy.
Around February 21st they had 25% cash in their growth portfolios.
- Right now the market is starting to show value in some places they are buying greedily.
Now they have only 14% in cash, they have been buying low.
- They still see the market as overpriced in many places, hence they think more corrections are to come, we probably are not at the bottom yet.
They have significant cash to buy more as opportunities arise when further clarity re the pandemic and stimulus come to light in the next 3-6 months.
So to answer the initial question above depends on your situation and we urge you to never act without specific advice from your adviser but for many long term investors staying the course on your strategy 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:
- 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.
- 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!
- 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
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.
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.
