Investing in uncertain times
We have entered unchartered territory in financial markets as governments, companies and individuals grapple with the impact of the coronavirus (COVID-19) pandemic on a humanitarian level and how this will shift the global economy.
Global financial markets have continued to decline in the last weeks, leading investors to reassess expectations for the future, especially in light of the disruptions caused to supply chains and reduced economic activity due to travel bans and social distancing.
We know that crises and disasters cause short-term financial market volatility. In this instance that volatility is extreme and widespread. As we continue through this period of heightened uncertainty, knowing what to do with savings and retirement planning becomes increasingly difficult. During this time, it is important for investors to remain calm and stay focused on their long-term investment objectives and financial planning goals. Keeping long-term investment objectives in mind and listening to the advice of your financial adviser remain critical.
Our portfolio managers are carefully and critically monitoring the markets and will remain true to their investment philosophies and not react to short-term noise but consider the longer-term impact of events.
Remembering long-term investment plans
Research has shown that investors, being humans, are driven primarily by the emotions of greed and fear and the regular updates on COVID-19 have certainly driven a feeling of fear.
A fear-based reaction to market volatility may mean that an investor could lose out on the subsequent market gains. The chart below illustrates how the significant equity market lows of 2008 (the Global Financial Crisis) were followed by the highs of 2009, with an annual performance of the index delivering a stellar 32%. It is also critical to note that significant volatility in markets that year, meant the low point reached negative 15%.
Chart: Annual returns of the JSE All Share Index with intra year drawdowns
While we cannot be sure of how long this volatility will last and what the ultimate outcome will be, it is useful to remember that volatility is normal, and discipline is required to ensure that well-considered financial plans deliver on long-term investment objectives.
What we do know is that markets will eventually recover as they did after the Global Financial Crisis 12 years ago, and the various crises before that. Just as investors have participated in the downturn, they should also participate in a subsequent recovery. On a short-term basis, portfolio managers are watching daily changes and will consider any portfolio adjustments to minimise sustainable losses.
During these times of market turbulence, it is important for investors to remain calm and hold on to long-term financial plans before making any emotionally-led or fear-based decisions. Keeping long-term investment objectives in mind and following the advice from investment professionals while the volatility continues, remains critical.