Increasing fears about the coronavirus Covid-19 and its impact on the global economy is having a significant impact on the markets, making this an uncomfortable time for investors.
Here we explore some of the implications of such a volatile environment.
The current climate
With the spread of the virus now appearing to slow in China but increasing its presence in both the U.S. and Europe, the market is currently focused on the potential negative short-term impacts on those economies and has reacted accordingly.
This is not a surprising reaction, as experts are saying that the virus is likely to continue to spread in the near-term and get worse before it gets better. Controlling the spread of the virus is clearly the number one priority for governments, but there is no way to know exactly when that will be achieved and when this market drop will end. But the market drop may turn out to be short-term in nature and making corrections in response to market falls and crystallising an investment can hurt your long-term returns if you miss out on the rebounds that follow.
The risks of trying to time the market
Financial markets do move radically and swiftly in times of uncertainty. With hindsight these movements are often disproportionate, and when more positive news emerges the market can also move swiftly upwards, and at a pace that is usually too quick for private investors to react to.
Whilst markets will naturally be volatile as short-term business and economic forecasts are impacted by the coronavirus, trying to outpace market movements is fraught with danger for individual investors. Those who are tempted to disinvest as markets fall then have to decide when to reinvest and typically leave it too late, subsequently buying when investment prices and markets have already risen.
Certainly, from previous events such as the October 1987 market falls and more recently the dramatic market movements in 2008 (triggered by the Lehman Brothers crisis), we can see that short-term negative reactions in the markets are often subsequently reversed by a strong longer-term recovery. Various studies that looked at such events show that, typically, ‘time in’ the market (i.e. staying fully invested) has been a more successful strategy for private investors than trying to ‘time’ the market.
Investing for the long-term
Recent weeks have emphasised all too well the important role that a well-constructed and well-diversified multi-asset portfolio can play to help you meet your investment objectives, while weathering unforecastable events like this virus.
At Blevins Franks, our clients are invested in risk-rated multi-asset portfolios, rather than just equities, which are matched to their individual risk characteristics and constructed specifically to navigate uncertainty over time. The underlying professional investment managers focus on maximising long-term returns by riding out short-term market volatility, looking for buying opportunities and being well-placed to benefit from the market rebounds that follow.
Market volatility is likely to remain until the coronavirus impact is seen to be contained, but in due course reactions to more positive outlooks and news is likely to lead to strong upward movements, and the key economic fundamentals matter most over more meaningful stretches.