Coronavirus, market falls and your investments − what you need to consider

Coronavirus fears hit global markets

Increasing fear surrounding the coronavirus outbreak has had a significant impact on markets around the world, with substantial falls over concerns about the effect on the global economy. As a result, many people’s investments, including those they have held in pension plans and ISAs, have been negatively impacted.

It’s likely that the coronavirus will continue to have an impact on markets over the coming months. But major events causing markets to fall, particularly in the short term, is something we’ve seen in the past.

Slow and steady wins the investments race

In the old tale about the tortoise and the hare, the moral was that you can be more successful by being slow and steady than quick and hasty. When it comes to investing, slow and steady is also more likely to win the race. In other words, the longer you’re invested for, the more likely you are to reap the rewards.

As you can see in the diagram, the past 35 years – which is as far back as data for the main UK market index, the FTSE® All-Share Index, goes – have offered exceptional returns for many investors.

Market falls have undoubtedly caught out some investors over the years, causing them to panic and sell, losing money in the process. On the other hand, those who’ve been able to stay the course and hold on to their investments patiently, or those that have been able to have the confidence to invest further funds into the market whilst it is depressed, are more likely to be reaping the biggest rewards.

Remember though that investment growth isn’t guaranteed – investments can fall in value too. And it’s possible that you could get back less than you paid in.

What causes us to ‘panic buy’ (or sell)?

Panic buying and selling represents the very worst of our investment behaviours. Why? Because it is emotion laden, focused on the short-term and driven by the behaviour of other people.

Emotions

When decisions are made in a state of panic, risk becomes about how we feel, not think. This is when we tend to jump to the worse case scenario and disregard how likely the risk is to occur.

Other factors only amplify our feelings and allow them to dominate our thought processes. The panic purchase of toilet paper is a great example in the current situation. The public have been overwhelmed with fear that a daily essential will become so scarce and have allowed this emotion to override the rational decision making about what to buy when.

This is also evident in the financial markets currently. An assumed or real limit on the ability to transact at a certain price (or any price) can also induce panic fueled by emotion.

Focused on short-term

In the midst of panic our concern becomes singularly focused on what is happening right now; we are gripped by the fears of today and abandon any thought of the future.  Our decision making becomes centred on a single goal – removing the worry. The greater the uncertainty and the less control we feel we have the sharper the urgency for us to act.  Whilst in certain situations in life this can be considered an effective adaptation for meeting our long-term investment objectives, such myopia can be staggeringly damaging.

Behaviour of other people

If we see a greater number of people engaging in certain activity, then we tend to believe that they possess more knowledge than we do. ‘Failing conventionally’ is also a huge influence on the behaviour of professional investors.  The management of career risk and the desire to protect assets means that the behaviour of others matters profoundly, irrespective of whether we agree with or understand it.

Steps to avoid panicked decision making

There’s a number of simple steps to follow to avoid letting the emotion and panic take over when making decisions about your investments.

1. Try to keep calm

It’s a very normal reaction to be concerned when you see the value of your investments fall. But keeping your emotions in check is important.

If you sell, you’re likely to be selling after markets have already fallen and, importantly, before they rise again. That means you’re locking in losses and will potentially have less money than someone who kept their money invested.

2. Focus on what you can control

While you can’t control how markets perform, you can control where you’re invested. Periods of significant market ups and downs (often referred to as volatility) are a valuable reminder of the importance of diversifying – or spreading your money across different types of investments and geographical locations.

If you’re only investing in one or two of these then you’re exposing yourself to quite a degree of risk. But diversifying across investments and countries can help you reduce the amount of risk you take.

 3. Keep a close eye on your investments

Any important event, wherever it happens in the world, may have an effect on financial markets. That’s why it’s important to monitor your investments regularly.

 4. Try to reverse the natural thought process

If you look hard enough there will always be opportunities from within a depressed market. Even in artificially depressed markets, such as the one we are currently experiencing. Research has revealed that when a market recovers, it typically experiences its faster growth in the first 6-12 months. Therefore, those invested when the market turns will benefit the most.

The key here is timing and acceptance of some further short term but smaller losses. In the current economy, the largest losses in the market have already been realised. Therefore, over the coming weeks and months the markets are likely to assume what would be described as ‘normal’ behaviour.

Opportunity is there if you’re willing and able to take such steps, but like any investment it comes with risk. You should always speak with your financial adviser before making any decisions. But with the dawn of a new tax year and the opening of the new year’s allowances for ISAs and pensions, now could be the time to consider your timing for investment.

Have your financial circumstances changes since the coronavirus outbreak?

Changes, whether expected or not, often act as a prompt to review the plans we have in place. The outbreak of coronavirus is no different. If you’re considering taking action as a result of what’s happening in markets or because your own circumstances have changed as a result then we advise you to speak with us as soon as possible.

Contact our team on 02380 920128 or email [email protected]

The value of all investments can go down as well as up and may be worth less than was paid in.

The information in this article should not be regarded as financial advice and is based on our understanding in March 2020.

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