"When the facts change, I change my mind. What do you do, Sir?" - Keynes
Experience tells us that events viewed through the windscreen are scary, but appear better once seen in the rear-view mirror.
If clues can be taken from history, Coronavirus will be no different and while there will be significant human cost, investment markets will recover, just as they have following the nine global epidemics we've faced since 1998.
It doesn't matter whether the market is being irrational on the upside (think tech boom or, more recently, Tesla) or the downside, there's always that nagging feeling that "perhaps its different this time".
Certainly, China is a larger economy, global supply chains are more interlinked, global debt is higher and investment markets have enjoyed a sustained period of high returns. But on the other hand, central banks around the world have demonstrated a preparedness to stimulate when required, supply chains are not just limited to China, and once society and investors understand and adjust to a new normal, fear recedes and opportunities emerge.
So, what's the appropriate response?
Well that depends on whether you're an investor or speculator, and whether your investment strategy fits with your investment time horizon and risk profile. Let's deal with each of these in turn.
If you consider yourself an investor, in my experience, trying to time the market is fraught with problems and a sure-fire way to destroy wealth over time. The idea that you can sell high and buy low sounds great in theory, but will you? Nobody rings a bell at the top and, even if you get that decision right, will you really buy back in when you're feeling at your most vulnerable and fearful?
I thought not, and that makes you perfectly normal.
So what does your timeframe look like? When do you think you'll need to use the capital? Assuming you haven't been investing your tax money as leverage in search of short-term returns, I suspect it is long term and long enough for markets to recover.
This brings us to your risk profile or attitude to investment risk, which tends to feel quite different when markets are performing to when they're retreating. Investing in accordance with your risk profile is fundamental to success as its objective is to ensure you will "stay in your seat" when investment markets do what they're doing now.
In summary, the human cost of the Coronavirus has already been significant, and I'm sure there will be more bad news before we're finally looking at this event in the rear-view mirror. How long, and what the final economic effect on individuals and businesses will be, is anyone's guess. But regardless of whether this results in a further temporary fall of 5%, 20% or higher in equity markets, I do believe that clients who are investors, with the correct timeframe, and invested in accordance with an appropriate risk profile, are best served by remaining disciplined and consistent with their long-term strategies.
In times like these there are a lot of unknowns and, in the absence of fact, conjecture and emotion usually fill the vacuum. The media and investment markets love conjecture and emotion but long-term portfolio and strategy decisions should always be based on fact.
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