Coronavirus’ impact on share markets is a hot topic at the moment. We’ve seen global markets fall by over 10% between 21 February and 2 March 2020. It seems that the market’s sentiment shifted literally overnight from a state of being arguably ‘over-optimistic’ to being ‘very fearful’. Some of my clients have voiced their concerns about the impact that coronavirus might have on their investments. I wanted to share my thoughts on this and what actions, if any, you might take.
The share market can be a wild ride, you just need close your eyes and hang on
When the market is running hot, most investors overestimate their tolerance for risk (volatility). Often people say, “I understand that share markets can be volatile, and I’m prepared for it, let’s invest”. However, when the volatility does eventually occur, that is when you really learn about one’s appetite for risk.
We must realise that volatility is often short lived. Share markets have a volatility rate of circa 20% p.a. This means, annual returns can vary from the mean (average) return by +/- 20% from year to year. However, in the long run, there’s a strong trend of mean revision – which means investment returns in the long run are more predictable. The chart below provided by global fund manager, Dimensional demonstrates this. Market returns 5 years after a major event (e.g. crashes, terrorist attack, CGF) are positive.
And realise that you have to be in it to win it
In the face of uncertainty (i.e. higher volatility), some investors consider selling. The problems with selling is that you will likely miss the recovery. The chart below (again courtesy of Dimensional) demonstrates that your investment return between 2001 and 2018 (more than 4,300 trading days) would reduce from 7.66% p.a. to 1.76% p.a. if you missed the best 25 days over that period. In this case, you would have been better off investing in bonds, not equities.
This proves that you need to remain invested throughout good times and bad. The first rule of investing in my book
Investopoly, is to ‘play the long game’. If you applied this approach when you first invested in the share market (i.e. a diversified portfolio of low-cost, rules-based investments contructed to maximise long term returns), then you must have faith that it will work. And it will, if you’ve
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