I often talk about the fact that investment markets can fall as well as rise, and that holding a long-term position and not panicking about market dips is key to a successful investment strategy. However, as an investor myself, I know that what your logical brain ‘knows’ doesn’t always tally with the way you ‘feel’ when you see your hard earned capital falling in value.
I wanted to let you know that we are actively monitoring the ever evolving situation, as are our investment partner FE. I also thought you might be interested in my summary view of the current market selloff:
Some Core Principles
Stocks and Shares fluctuate in value because of supply and demand. If more people want to buy a particular stock than sell it, the price increases. If more people want to sell than to buy it, the price decreases.
The general mood of investors (Investor sentiment) plays a large part in whether markets rise or fall. When investors are feeling positive about the prospects of a particular company or market they want to buy, so prices go up. If investors are feeling pessimistic they want to sell, so prices go down.
Background to Current Market Drivers
The Covid-19 pandemic has sparked understandable fear and confusion. According to the WHO, around 80% of COVID-19 cases are mild, with either cold or flu-like symptoms. However it can be more serious, usually for those more vulnerable, and in some cases fatal.
As far as investment markets are concerned, it is the impact of containment measures, travel restrictions, potential supply chain disruptions etc on businesses and economies that is the key cause for concern – not the severity of the virus itself.
Disruption in Middle Eastern economies as a result of Coronavirus and a retaliatory move by Saudi Arabia against Russia’s refusal to work with OPEC, prompted the Saudis to increase oil production to slash oil prices (back to the laws of supply and demand).
Falling oil prices might be good news for consumers, but they are bad news for energy companies and countries that rely on petroleum revenue, and the biggest investment markets have significant exposure to these producers. The sudden drop in oil process also added to the confusion already prevalent, resulting in the dramatic sell-off.
What Does This Mean for your Investments?
I have included some extracts from a recent communication issued by our investment partner FE, which I think summarises the situation well and outlines what is being done behind the scenes to protect your investment:
We think much of the selloff is being driven by confusion and uncertainty rather than any fundamental change in circumstances and the sudden shift in oil markets won’t have helped.
This will likely continue for at least a month or two before we get through the peak of the epidemic and markets begin pricing in recovery and normalisation. While we don’t want to minimise what is going on, we also want to emphasise this is only the beginning. How far and fast the virus spreads, how extreme containment policies will be and ultimately how big an impact it will have on society as well as markets are still unknown.
Importantly we won’t be reacting to every new bit of news or market wobble. While we weren’t prepared for a pandemic, the possibility of a selloff for whatever reason is baked into our thinking at all times. The market selloff has been rapid, but also sentiment driven. The recovery could be equally as rapid when the current crisis passes. We will be focused not on short term market movements, but signs of knock on events that change the long term picture.
We don’t anticipate making any changes to the portfolios at this time as they have proved fairly resilient so far. We will of course be ready to act if things change. Additionally, we will be putting a series of measures in place to ensure we stay on top of the situation and keep you informed.
Our focus on risk management makes us well placed for situations like this. While we have no concern currently over the long term growth of the portfolios and expect the worst of this to be behind us by the summer, we want to reassure you that we are preparing for every eventuality and will keep you in the loop every step of the way.
The Importance of Managing Risk
A client commented earlier in the week that he had been pleasantly surprised when he logged in to his portfolio to see that the value of his investment hadn’t fallen as much as he had feared. Our investment partner FE’s robust approach to risk management comes to the fore in situations such as these.
I put together the below performance charts earlier this week, comparing the performance of a number of our most ‘frequently used’ FE portfolios against key market indices since the start of the Covid-19 outbreak.
Chart 1 – Hybrid Portfolios
Chart 2 – Responsibly Managed Portfolios
I am a big fan of responsible investment, and was delighted when FE announced they were introducing a range of responsibly managed portfolios. We have recently transitioned a number of clients across to these responsibly managed portfolios and, as the charts above demonstrate, they seem to be holding up well - perhaps an indicator that being responsible is the way forward, for investors, companies, societies and economies alike.
While I appreciate things may feel uncomfortable at the moment, my advice remains to trust in the long-term plan and to focus on what is truly important to you. There are always positives to be found in what might initially appear to be negative situations. In my mind it triggers a desire to be a bit more self-sufficient, to ensure resilience to unexpected outside influences and sparks further appreciation of the fragile world in which we live.
From a financial perspective, a market sell off is actually a great opportunity to invest, buying in at a low provides the potential for significant gains when markets start to rise again (which they will – eventually!). Gains tend to be concentrated around losses, so being ‘in the market’ at rock bottom can be a lucrative place to be.