Before I go on, let me make one thing clear. I am not a virus expert. And in fact, I don’t believe there are a lot of finance people that are. I’m not going to be able to provide you with much insight or in fact any valuable information in this respect as I’m sure we are all reading / seeing the same stuff online or on TV. That said, I do have a great understanding of investor behaviour and how we as humans are hard-wired to react to risk.
To that end, it’s been just over one month since the Aussie stock market collapsed from its peak – 18/02/2020, the ASX 200 index closed at 7,113.70 points. Yesterday, 19/03/2020, the ASX closed at 4,747.60. Now, that’s a 33.26% decline in 31 days. Insane.
For those investors fearful of what is yet to come in financial markets, understand this, the bottom is unpredictable, a recovery is certain. I have spoken to so many people who have no idea what they’re doing. And it’s okay when the stock-market is rising, everyone’s a genius. But these are the times when you need somebody on your side. Someone to help contain your fears. Someone to remind you of the game plan. Someone to keep you in check. Someone to provide you with guidance, and someone to stop you from doing something you’ll regret.
I’m sure that question has crossed your mind at least once. You know, the ‘should I just sell everything’ question. Good question. And a good question deserves a good answer. What if you sold today? What if you’re wrong? What if you sold out at the bottom of the market – the worst time? What if the market went on to make new all-time highs from here? Let’s say you got the call right. You sold out. You are now faced with another tough decision. When do you get back in? There is no bell that gets rung when the market hits the bottom – you’re just not going to know when the dust has settled. Because unfortunately for you, the market moves too fast. And if the best hedge fund managers in the world can’t get it right, wow, you’re kidding yourself.
It’s simple, cast your mind back to 9 March 2009. The stock market had bottomed. There was no official announcement like the one President Trump made last week (see below). The headlines were still being published. It was still doom and gloom, and the worst was yet to come. Well, we had in fact seen the worst – it’s just that no one knew it at the time. Less than 3 months later the stock market had climbed 41% from the March low. And those folk have missed the opportunity of doubling and tripling their assets.
Trying to time the market is a dangerous game. You just cannot afford to miss the 10 best days in the market – otherwise your capital is wiped clean. And if you think you’ll miss the bad days and pick the good days. Well, unfortunately for you, the statistics are clear. The best days often follow the worst days, and the worst days occur in periods of above average volatility.
So, here’s what you should think about doing:
If you’re fully invested – you’ve just got to ride it out. It’s the game you agreed to play.
If you already have a diversified portfolio – think about using this as an opportunity to rebalance your portfolio, you know, sell high buy low. Doesn’t feel right but I can tell you it works.
If you’ve been sitting on the sidelines – Please, do something about it! Get a game plan in place and start putting together an investment program that you may want to implement over a 3, 6, or 12-month period. You may have felt foolish for sitting on the sidelines for so long, but please don’t look back in 5 years’ time and feel foolish again.
And if you want to see the science behind why you should be thinking about doing the above, here it is:
Source: Ben Carlson – https://awealthofcommonsense.com/ and Robert Baharian – Baharian Wealth Management
One of the questions I’ve been getting quite a bit is about the recovery, and what this might look like. Although the numbers are from the US, I think this table is still very relevant. As you can see, when markets have experienced severe declines, the forward 1, 3, and 5 year returns have been very strong. With an average return of 52%, 88%, and 132% respectively.
With every point the market falls, the probability of long-term losses diminish. And the probability of profits increase. I know it’s really hard to keep calm right now, and buying stocks feels like the wrong thing to do, but that’s usually a good sign.
“Be fearful when others are greedy, and greedy when others are fearful.”
– Warren Buffett
Let me leave you with one final perspective from one of my colleagues Peter Mancell from FYG / Mancell Financial Group:
“If you can block out the noise surrounding the COVID-19 pandemic it will be much easier to be there for the inevitable recovery.
Will there be a recovery you might ask? It’s a very black and white scenario. Either we believe this gets better. Believe there will be a cure or a vaccine (the first live test has happened). The spread will eventually be contained. The recoveries will outpace new infections. Stimulus calms down markets. Demand swells. Companies get back to business. Economies and markets come roaring back.
Or we don’t.
If we don’t, then there are much bigger problems than our portfolios or money. That’s a serious statement. The toilet paper wars haven’t shown humanity in its best light, but the best global medical minds are on the case. No one can seriously argue that a cure or vaccine won’t be found. That argument is a bet against all of humanity’s progress to this point. We’re leaning on the side of optimism. It hasn’t failed yet.”
Please look after yourselves and heed the advice of those experts who know what they are talking about. Now is the time for a calm, measured response and not panic about portfolios, toilet paper, or anything else. You’re either betting against humanity or you’re backing us in. We’ve recovered from things far worse than this (World War 1 and 2 come to mind) and we always come out better and stronger.
If you want to continue this conversation please don’t be shy to contact us.
Published by Chris Giaouris, Partner, Chronos Private.
Originally inspired by Robert Baharian, Baharian Wealth Management, March 2020.