Published on: 3rd April 2020
We’re only a few months into 2020, and already the investment markets have experienced significant volatility. Coronavirus has been making headlines globally, and not just due to the health implications but for the economic impact too. As a result, investments may have experienced volatility and you may be worried about what it means for your finances.
Since the beginning of the year, the virus, which started in China, has spread across the globe. It’s infected hundreds of thousands of people and the death toll surpassed 30,000 in March. In a bid to control and slow the spread of the disease to ease the impact, governments around the world have taken unprecedented measures. In the UK, this has included closing schools, many non-essential businesses and imposing limits on when people can leave their homes. These measures along with the uncertainty have led to stock markets falling sharply in recent weeks.
Between 24th February and 23rd March, the value of the FTSE fell by around 30%. Other markets have seen similar falls too. This can be worrisome, but it’s important to keep the bigger picture in mind. This isn’t the first epidemic or pandemic the world has dealt with. Earlier this year, Charles Schwab published research into the reaction of global stock markets.
Whilst these too brought uncertainty to economies, the long-term view highlights the overall trend of markets continuing to rise even after they experience short-term dips.
4 investing lessons to keep in mind during the coronavirus pandemic
1. Invest for the long term
The coronavirus crisis highlights why long-term thinking is essential when investing. If you’d asked anyone last year what the biggest risk for financial markets would be in 2020, we doubt many people would have said a pandemic. Unexpected factors that you have no control over will influence the stock markets at different time. If you’re investing with a short-term time frame, it can have a significant impact on returns, with losses more likely.
However, a long-term time frame provides an opportunity for the peaks and troughs to smooth out. When you look at the value of financial markets, there have been many times values have fallen, during the dotcom bubble and 2008 financial crisis to name but a few. But look at the values over the decades and you see a steady rise once you screen out the extreme highs and lows. This is what you should focus on, particularly during periods of volatility.
2. Keep your financial plan in mind
As tempting as it is to sell during a downturn, after all, no ones likes to see the value of their investments fall further, most investors should stick to their financial plan.
Seeing values falling is a daunting experience but until you sell, keep in mind these are paper losses only. Selling now means you miss an opportunity for values to rise in the future. Whilst reviewing your portfolio is important, changes should usually only be made if your goals have changed or you need to rebalance your portfolio. If you’d like to review your current investments, please get in touch.
If you’ve invested with a long-term plan, short-term volatility should have little impact on your overall goals and aspirations. Many of our investors got through the last financial crash in 2008 to see their portfolio recover in the months that followed, whilst we can’t make guarantees, history tells us the same will happen following the pandemic.
3. Build a balanced, diversified investment portfolio
You’ve no doubt be reading about the impact of the coronavirus on stock markets over the last few weeks. Headlines have screamed about the latest falls, in fact, we’ve mentioned the 30% dip above. But, in most cases, this isn’t the impact you’ll have seen on your own investments.
Balanced, diversified portfolios will contain a range of asset classes and invest in a variety of sectors. This is designed to cushion the blow at times like this. So, whilst the stocks and shares in your portfolio may have fallen sharply in March, other assets, such as cash and bonds will have helped stabilise the overall value to some degree. How your portfolio is mixed will depend on your risk profile, which brings us on to the next point.
4. Weigh up your risk profile when investing
If you’re not comfortable with the current investment volatility your portfolio is experiencing, it may be time to review your risk profile. Generally speaking, the more risk you take with investments the higher the potential returns, but you’ll also experience greater volatility and potential for loss. You need to feel confident in all aspects of your finances, including investment risk.
Whilst the above four lessons are important to keep in mind, it’s natural to still be worried about what the volatility means for your future. If you’d like to talk through concerns about your investment propositions, please get in touch.
Please note: The value of your investment can go down as well as up and you may not get back the full amount invested. Past performance is not a reliable indicator of future performance.