How Badly Will Coronavirus Affect Your Investments?
It’s a worrying time for investors. How deep and how long will the effect be of the Coronavirus crisis on your pension pot and savings? Should you take all your money out now? Or tough it out and hope for the best? Will your money ever recover back to its previous value?
Here at Oaklands Wealth Management our team have been analysing the situation carefully over recent weeks and bring you a summary of our thoughts below. It’s a distillation of the service we give to our clients and is the same approach I take for 3 generations of my own family’s investments.
Firstly, the speculation. The OECD have warned the outbreak could halve global economic growth this year. Governments and banks around the world are preparing contingency plans, not only to protect public health, also to limit the economic impact. We are not about to downplay what is a very serious situation as frankly nobody, not even the Government, are yet in a position to predict the final impact or whether it can be fully contained by the summer.
What we do know is fear, like a virus, can be contagious.
And times like these we need to put our finances in perspective. You’ll be aware of the caveat that follows any financial advice “Past performance is no guarantee of future results”. However, anyone with even a scant interest in history will be able to identify trends which are useful to learn from. And further analysis often reveals a repeating of historical events from which we’d all be wise to take note of. This applies whether building our wealth, or for those already enjoying the fruits of their labours.
For anyone in retirement and drawing from their investments, it’s worth remembering historically a pension fund would have been given up in exchange for an annuity, at whatever the value of the fund was at that time. As a result, the income would be fixed for the remainder of the lifetime and there would be no access to the fund as personal capital or as a legacy for the family.
In some cases, this may have meant cashing in your pension at a time when markets were at a lower point, having a direct negative impact on your income for evermore. Now, in the modern world of drawdown pensions, you can take monies from your pension fund as and when you need to; and vary your levels of income.
Of course, at times like these, when there is more uncertainty in the markets than usual, having such flexibility may seem of dubious value. Here is where we need to keep a sense of perspective as to the upsides of having control of our own affairs.
A pension within our own control means we can regulate our own income, choosing to make adjustments at times like these to minimise our drawdown; while all the time having the money invested for future growth and inheritance for our loved ones.
For anyone in pre-retirement who is accumulating money into pensions and savings, any reduction in the value of equities and other stocks means more units can be bought for the same money. This is good news for the longer-term value of your investments, as when prices recover you make a gain in your fund values.
The pitfalls of watching the FTSE100
The FTSE100 London Stock Market index has seen one of its most dramatic slides once the potential effect of the Coronavirus became fully apparent. On 19th February 2020 the FTSE100 stood at 7457. By 23rd March 2020, it had dropped to 4993. That’s a drop of 33% in 33 days.
Naturally you may think your investments have plummeted by the same amount. If your funds are sat in a FTSE100 Tracker Fund then you’re probably right to be concerned. Being 100% in equities is never wise, even for an adventurous investor.
By contrast, if you’re in a diversified portfolio your exposure to equities should be tempered by a mix of other assets; including bonds, cash and gilts in an appropriate proportion for your age, risk profile and circumstances.
And at times like these, smoothing out the low points of a market cycle should be your primary objective in the short term, while retaining a suitable mix of investments which can benefit from future upturns.
Here’s an example of one of our client’s portfolios. They are aged between 60 and 69 with a moderate attitude of risk and it shows performance between 1st January and 3rd March 2020.
The chart shows the value of an Oaklands Wealth diversified portfolio compared to the FTSE100 (The top 100 UK company shares by market capitalisation).
While it’s nigh on impossible to make gains in such times, the buffering effect of a diversified portfolio means less than half the reduction in value over this period (-5.57% against -11.05% for the FTSE100 Index). To emphasise, the amount in UK and international equities is a maximum of 45.5%.
Furthermore, for anyone thinking about disinvesting from equities and stocks to cash or cash-equivalent investments, take a step back and consider the proven principle of fund diversification.
For our clients here at Oaklands Wealth, diversification is a key principle in the way we construct investment portfolios. There are 3 main ways we diversify funds:
- Spreading across different fund managers, and different investment companies
- Splitting between various asset classes e.g. UK shares, fixed interest and government gilts
- Dividing within asset classes – e.g. investing in many industry sectors
Not all sectors are affected equally in our current situation. Clearly, funds relating to travel and hospitality have sustained the heaviest early devaluation, with mass cancellations of events and trips. Video conferencing and home delivery services however, are booming. Again, a spread of sectors mitigates the risk.
WARNING: Investors who cash in their savings face the headache of judging when to re-enter the market.
Timing The Market – Missing The Best Days.
‘Market timing is the strategy of making buying or selling decisions of financial assets by attempting to predict future market price movements.’
Let’s remind ourselves of the reasons why trying to second guess the market is so precarious:
Not only is timing the market notoriously difficult to get right, it also poses the risk of missing the best days when share prices increase significantly. Historically, many of the best days for the stock markets have occurred during periods of extreme volatility.
Anybody who pulls money out in the early stages of a volatile period could miss these good days, as well as potentially locking in some losses. For instance, between May 2008 and February 2009 in the depths of the global financial crisis the MSCI World Index* dropped by -30.4%. By the end of 2009 it had bounced back to +40.8%.
[*The MSCI World Index captures large and mid cap companies across 23 Developed Markets, with 1,644 constituents.]
As members of the human race it seems we have a tendency to buy and sell investments at the wrong time and tend to be unduly affected by the prevailing mood, whether buoyed by over-confidence at high points (Remember the Dotcom bubble in the late 90s?) or be overtaken by gloom as markets see dramatic falls as in the current Coronavirus situation.
Rather than getting caught up in these short-term swings in mood, a better approach is to accept that markets are by their very nature volatile, and stay focused on our long-term goals.
5 Recessions In 50 years.
If you take the worst-case scenario view – the prospect of this pandemic tipping the UK and other countries into a fully blown recession, then consider this – there have been 5 such occasions in the UK since 1961. Our most recent experience is of course the 2008/9 Financial Crisis. And time after time, the financial markets have recovered, following a period of high volatility.
I set up Oaklands Wealth in 2004, so by the time that recession came we had plenty of clients to steer through some very choppy waters. Our approach now is no different to then. No knee jerk reactions.
Please don’t mistake this for complacency; we shall be monitoring the situation on a weekly basis and our chosen fund managers are making small, carefully thought out adjustments on a daily basis.
What should be your next steps?
It is clear it will be months before the spread of the virus reaches its peak in the UK. During this time stock market values will continue to be volatile and indexes such as the FTSE100, FTSE250 and Dow Jones may see significant further falls
China provides a model for us to think about what lies ahead.
China implemented strong measures to control the virus, which has hit its economy badly in the first quarter of this year. Once the level of daily infection peaked in China however, the process of returning to work started and financial markets started rising once again.
By comparison, the virus is still spreading in the Britain, the US and Europe and it is likely the disease will take two to three months to peak in these regions.
It is the uncertainty around the timing of the peaking of the virus and the short-term economic impacts it is having on businesses which is causing current market volatility.
We must therefore maintain a perspective on the longevity of this situation.
Now is not the time to give in to fear.
Let’s look at where this all started, China; where the earliest person with symptoms can be traced back to 1st December 2019.
Then on 19th March, 110 days on from this date, the National Health Commission of China reported for the first time there were no new cases of any kind in Hubei, the Chinese province where the outbreak began, In recent weeks, with new daily cases in China dwindling into single digits, the country has been turning its attention outwards to offer a huge programme of humanitarian assistance to help the rest of the World get the virus under control.
My personal trainer has a friend working as a teacher in Changzhou, China, a couple of hours from Shanghai. His friend texted him on the 19th March to say the sun was out and the parks open again after 2 months of lockdown. China is getting back to work, children are playing in the parks again and there is reason to be hopeful. The worst, for them, has passed.
Within months it is likely to have reached its peak in the UK and when that happens and people start getting back to some normality, financial markets will pick up some confidence and stock values will begin to rise once again.
This is not the same sort of situation we all faced in the 2008/09 financial crisis. Yes, there will be economic consequences for many sectors and many people. However, with a global response to tackling the spread, and focused research for a vaccine, it shall be, in all probability, a relatively short-lived episode.
Stock markets dislike uncertainty more than any other factor. This explains why there has been such a strong reaction in the last 5 weeks. In the absence of precise data, markets will tend to overdo the pessimism.
Bear in mind also, many trades on the stock market are automated. A stock trader programmes the parameters by which to buy or sell stocks, and a computerised automated trading system does the rest. This is why trading can quickly get out of control and huge slides in the values of stocks happen in a single day.
By contrast, our investment process at Oaklands Wealth ensures all funds we invest in, are regulated by the Financial Conduct Authority (FCA). They are overseen by seasoned fund managers who have a team of analysts to inform rational buying and selling decisions.
It is too soon to know precisely when the spread of the virus will start on its downward curve in the UK. When this happens there will, like China, be reasons to be hopeful in the UK and markets will begin to react more positively.
What history teaches us about financial recovery
JPMorgan has assessed the market impact of past outbreaks, notably Sars (November 2002 to July 2003), swine flu (March 2009 to August 2010), Ebola (December 2013 to June 2016) and the Zika virus (March 2015 to November 2016).
In each of those cases, a sharp initial stock market decline quickly gave way to a recovery.
The MSCI China index fell 8.6 per cent on the SARS outbreak but rebounded by more than 30 per cent in the three months after April 2003.
Similarly, swine flu triggered a 4 per cent drop in the MSCI Mexico index, which then gained more than 25 per cent.
“The more equities fell initially, the more they subsequently rebounded,” wrote Mislav Matejka, head of global and European equity strategy at JPMorgan in London. “These episodes did not lead to a prolonged period of selling and were a buying opportunity within weeks [of the peak].”
The chart below shows the effect of previous outbreaks on financial markets, in terms of the percentage change in market values from the start to the crisis peak, and then one month after and three months after.
This may seem improbable to you now, and only hindsight will tell when the bottom of the stock market has been in any given period. Once investors realise it has come and gone, the fear of loss gives way to fear of missed opportunity and those sitting on large amounts of cash have the unenviable task of deciding when to re-enter the financial markets.
For those of you in the process of building your wealth and making regular payments into your pensions and other investments, we believe that continuing with this will stand you in good stead for the years to come.
Those who have taken the longer view and sat resolutely with their diversified investment portfolios are those best placed to recover the value in their investments.
The Oaklands Wealth Service
Quality service depends on 3 things – competent people, a consistent process, and COMMUNICATION
Are you getting this from your existing advisor? Are you really certain your money is in the right place and in the right hands?
Have they structured your portfolio to be resilient in these times? And ready for the bounce back if this follows the pattern of other outbreaks?
If you’re in any doubt, surely a second opinion would be sensible?
We offer you a FREE INVESTMENT AUDIT worth £250 and unlimited free follow up meetings via Skype, Zoom or Face Time to give you that second opinion.
Then you’ll understand how your money can be managed properly to smooth out the low points and position your portfolio for growth.
If you like what you see, we can handle all the paperwork remotely, and by ‘phone or video call should you decide to take up our service.
Can you really afford not to look into this…?
Or call us on 0121 355 4455 to find out more.
Kind Regards, Helen
BA(Hons) DipFA MLIBF AwPETR
ISO 22222 Certified
Oaklands Wealth Management Ltd
P.S. As an added bonus we’ll also show you how our cashflow modelling tool helps you safely take an income for life in retirement, without the worry of running out of money.