With the WHO officially declaring the Coronovirus a pandemic, it’s tempting to want to get rid of any risky assets and protect your core investments. But with the global economic picture changing by the minute, a knee jerk reaction could leave you more exposed than a measured response and a diversified portfolio.
How Coronavirus is affecting investments
Due to the current market volatility, your investments are likely to have taken a hit as few companies have escaped unscathed. The European-wide lockdown has had a knock-on effect on parent companies such as Associated British Food who own Primark.
The travel industry is also taking a hit with the collapse of the already troubled Flybe potentially presaging an industry-wide bailout. And with markets taking their biggest fall since 1987’s infamous Black Monday, it’s unsurprising that investors are getting jittery.
However, the advice from market professionals is to sit tight and let the event-driven bear market recover its losses. In turbulent times, one bad decision could hurt your portfolio deep into the future. A smart investor learns to trust the historical data before making a calculated next move.
How markets react in a crisis
The unpredictability of the current health crisis makes it difficult to predict the timing of the market. What we do know from the historical data relating to previous outbreaks is that, as disruptive and scary as they can seem at the time, the historical data tells us three important things:
- The Coronavirus is unpredictable as are the economic effects
- The market has recovered after previous crises
- Predicting when to get out and back in the market is tough so best to sit tight
Learn the lessons
As an investor, you’ll already have experienced some steep losses. The historical data shows that previous outbreaks including SARS and H1N1 have caused stocks to drop and then rebound within 6 months, up 10% on the average. The lesson seems to be to sit tight in the face of what equates to a typical stock market correction.
The Chancellor recently announced a full package of measures to combat the effects of Coronavirus in the recent Budget and leaders around the world have taken steps to sustain their economies and support business at this unprecedented time.
But what wealth management measures should you be taking now in order to protect your investment portfolio?
Don’t panic trade
A market correction is the worst possible time to start panic trading. Instead, reevaluate your portfolio and ensure that it aligns with your goals. Step back and take a long term view and remember that smart investors will be in for the long haul.
If you plan to outearn inflation, higher-risk stocks have shown a substantially higher return than low-risk assets. It’s reasonable to assume that this pattern will hold true after the current crisis. Keep your emotions in check and use this opportunity to reassess, rebalance and exploit undervalued stocks when the opportunity arises.
Diversify your portfolio
If your investments are performing in lockstep, it could be time to diversify your assets. Your portfolio should be an accurate reflection of your own attitude to risk with a balanced mix of bonds, equities, property and cash. You should aim to have at least a part of your portfolio in preservation assets that can help you take advantage of any market opportunities.
But beware of over-diversification. Holding too many assets can mean you don’t see much in the way of positive results from your investments.
Increase your liquidity
If you want to ride out the current crisis, there’s no substitute for liquidity. Investors should look to create a sizable emergency fund comprising the cash equivalent of up to three years return on your portfolio. Secure lines of credit can also ease the pressure if the drop in the markets continues to bite.
Spot the buying opportunities
Establishing liquidity can also let you take advantage of market opportunities as stocks continue to drop. Look for buying opportunities in the healthcare market as the emphasis falls on vaccines and cleanliness. Be ready for opportunities to bottom fish for stocks in this volatile market, but beware of overbuying. It’s still tough to predict what will happen to the market as the Coronavirus is not yet contained.
Stay calm and clear-headed and let history and your knowledge of past market behaviour deliver perspective and drive your decisions. And don’t forget to wash your hands.
Nick Brown has been a partner at Brighton based UK accounts firm, Plummer Parsons since 1990.
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