Keeping a sense of perspective
With little sign of calm returning to financial markets as the coronavirus pandemic spreads, what steps might investors take to avoid making costly investment decisions?
- Financial markets could be very volatile for some time as the coronavirus pandemic spreads
- Focusing on the long term can help investors avoid costly short-term decisions
- Many of the strongest days in equity markets have followed shortly after the worst
- The coronavirus pandemic will pass relatively soon; the economy and markets will bounce back.
The potential impact of the coronavirus pandemic on health systems and the global economy helped trigger some of largest ever intraday swings in equity prices in March. A savage end to the longest bull market saw many financial markets nursing heavy falls for the month. With little sign of a market recovery in sight, what should investors do next?
When portfolio valuations swing wildly and there is little indication of when they will start to recover, investors can be forgiven for being worried and wanting to sell investments. However, holding firm and focusing on your long-term investment objectives, rather than the shorter term effect on portfolio valuations, is often the smart move.
That said, staying invested, or even making new investments, as markets are selling off requires much composure and discipline. It is when markets look most precarious that our impulsive urges can lead us astray.
Selling investments in a hurry before gauging the best time to start buying them again can be a dangerous strategy. Not least because emotionally-driven investors may delay re-entering the market until they are confident the worst is over. In turn, risking missing out on much of the recovery. Indeed, many of the “best” performing days in equity markets have followed the worst. Missing out on just a few of those days can be very costly to your long-term returns.
At worrying times like these, a sense of perspective can be invaluable. For all the awful ramifications of the pandemic, it is likely to pose a relatively short-term, sharp hit to the global economy. Any recession seen later in the year should be quickly over, with growth resuming next year. Focusing on your long-term objectives should be the basis of all your investment decisions.
Focusing on the longer term
One possible way to deal with periods of particularly heightened volatility, like these, is to focus on the longer term. This can include the reasons for making the investments, checking that your portfolio is well positioned to provide the type of investment returns needed to meet these objectives and assessing whether new market opportunities are available to help achieve them.
Investing regular amounts of capital into any fresh investments over a period of time, rather than in one lump sum, may be the sensible option. Especially in periods when asset prices are regularly swinging violently, as seen since February.
The elevated levels of volatility seen in equities, bonds and commodities in recent weeks highlights the importance of a strong investment process and a considered approach to assessing risks and opportunities. Furthermore, having such a process in place with an eye to the long term can help fight any potentially costly urges to sell investments.
While the coronavirus will eventually pass, it will not be the last event to cause extreme uncertainty in markets. Both Brexit trade talks and the US elections loom on the horizon as key events later in the year outside of the virus.
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