LET'S TALK COVID-19 IMPACT
We expect you are noticing the media headlines regarding coronavirus and the higher levels of investment volatility. We want to reassure you that we continue to actively monitor your investments closely.
After a period of optimism, global investment markets have hit the panic button on fears about the possible economic impact of the coronavirus (COVID-19).
After a strong 12 months for investment markets, February has seen a reversal in confidence due to the Novel Coronavirus outbreak, a more contagious virus than SARS (2002) and MERS (2012). The issue for consideration is the impact on the global economy and the influence on China which is now far larger than it was in 2002 when SARS occurred. Using SARS and MERS as a benchmark in history, it is expected that markets will typically rally once the number of new cases peak. Until that stage, we do expect investment markets will be somewhat volatile. Some commentators suggest a 6 to 8 month period between initial outbreak and peak cases, suggesting July or August.
At times like these, it’s good to get some perspective. Australian shares rose 24 per cent last year, touching record highs, and 10 per cent a year over the past seven years. Global shares rose 28 per cent last year and 17 per cent over the past seven years. After such a good run, many observers have been saying shares were looking fully valued and that a correction was likely. The thing with market corrections is that it is impossible to predict what will trigger them or how long and severe they will be.
Avoid knee-jerk reactions
At this point, markets are responding to uncertainty and fear. Nobody knows what the extent of the economic fallout will be, so the temptation is to bail out of shares and put your cash in the bank. Or jump ship and switch to a ‘safer’, more conservative option in your superannuation fund.
Just to assure you, while the urge to act and protect your savings is understandable, knee-jerk reactions can be a mistake.
It’s near impossible to time the markets. Not only do you risk selling when prices are near rock-bottom, but you also risk sitting on the sidelines during as the market recovers. As history tells us it always does.
In an ever-changing world, the basics of investing stay the same. By sticking to some timeless rules it’s much easier to avoid emotionally driven reactions and focus on your investment horizon.
Sticking to the plan
You are investing in a lifelong journey and like all journeys you are more likely to reach your destination if you plan your route. Without a plan, it’s easy to be distracted by the latest market worries and short-term price fluctuations.
Think about your personal and financial goals and what you want to achieve in 1,5,10, 20 years’ time. Be specific, put a dollar figure on your goals and plan how to reach them.
What are governments doing
Over the last 24 hours, we have seen close to $1.5 trillion dollars in stimulus packages being promised by governments around the world. The US has led the way with nearly $1 Trillion, however the markets were not impressed with how it was delivered and also the ban of flights into the US from Europe compounded peoples fears. In regards to the Australian Stimulus Package announced by Scott Morrison yesterday, he promised just under $18 Billion to the economy, primarily in support of small businesses to help Australia avoid a recession.
Low risk comes with lower returns
Many people are wary of investing in shares because of the perceived risks. Growth assets such as shares and property do entail higher risk than cash in the bank, but they also deliver higher returns in the long run.
Perhaps the biggest risk of all is not earning the returns you need to achieve your goals. While domestic and international shares produced stellar returns last year, cash returned just 1.5 per cent which was below the level of inflation. Cash returns were not much better over the past seven years, averaging 2.2 per cent a year.
Spread your risk
Shares, property, bonds and cash all have good years and bad. While shares and property tend to provide the highest growth over time, there will be years when prices fall or go sideways. In some years, bonds and even cash produce the best returns. In fact those of you who have exposure to bonds, which is pretty much all of you, would have benefited with the recent reduction of interest rates both in the USA and at home. Remember when rates go down the bond value generally goes up.
Let your savings grow
The effect of compound interest is often referred to as magic, but there’s no trickery involved. Better still, it requires no work on your part, just the willpower to reinvest the income you earn on your investments, so you earn interest on your interest.
Rather than sell shares in quality companies in a panic, you could continue to collect your share dividends and reinvest them in more shares or other quality assets. This way, you avoid crystallising short-term paper losses and benefit from the inevitable market recovery.
That’s the simple but powerful concept behind superannuation which locks away your savings and all investment earnings until you retire.
We’re here for you
When fear is driving markets, it’s important to get back to basics and think long term. If you would like to discuss your overall investment strategy, please don’t hesitate to get in touch.