Staying calm amid the chaos

The COVID-19 coronavirus has caused uncertainty and even panic. For financial investors, staying calm and maintaining a robust investment strategy is the best way to maintain your long-term financial health, as Fennell West director JARROD OWEN explains

It goes without saying that we are facing an unprecedented situation due to the outbreak of the COVID-19 virus.

This is already having an impact on financial markets around the world and is likely to continue, at least in the short-term.

Investors have endured days of increasingly grim updates on the spread of the virus, as new infections continue to rise even as countries enact measures to contain the pandemic.

Although these are very uncertain times, we can be confident that we’ll get through it.

In this blog we want to arm you with information to navigate this period of market volatility to ensure that you’re in good financial health when things settle.

But before we get there, here is a brief summary of what the likely economic disruption might be globally.

The continued spread of the virus and the disruption to­ supply chains across the globe has begun to filter through markets, causing the heightened volatility that has been witnessed over the past week.

While it’s still relatively early to determine the extent of the impact, certain sectors and companies will face significant pressure on earnings the longer the virus remains uncontained.

Supply chains have already started to see the effects of factory shutdowns. For example, Hubei Province, the epicentre of the virus outbreak and an area under significant quarantine, is a key location for electronics and technology manufacturing.

“The legendary investor, Peter Lynch, warned ‘far more money is lost by investors trying to anticipate corrections … than has been lost in corrections themselves’.”

Additionally, commodity imports into China have been disrupted as factory shutdowns have halted the manufacturing sector’s demand for external resources, such as petroleum and metals.

The extended closure of Chinese industries, restrictions on people movement, disrupted supply chains, declines in key commodity prices, bans on Chinese travel and the flow-on effect to confidence will impact the countries and regions most heavily reliant on China.

Ultimately the full impact will be determined by the rate of spread of the virus and the medical and scientific communities’ ability to develop a treatment that can be distributed at scale.

From an Australian equities perspective, 2020 earnings estimates for the Resources (Energy, Iron Ore and Copper), Tourism/Travel and Consumer Discretionary sectors are likely to be impacted due to the virus especially when combined with recent bushfires across Australia.

On March 3, 2020, the Reserve Bank of Australia (RBA) further cut its interest rate from 0.75% to a record low of 0.5% in an attempt to calm investors and diffuse the concern about the impact that COVID-19 will have on the economy. The RBA also gave guidance that it would ease rates further to provide additional support to employment and activity if need be.

So given these likely global disruptions, how should you be responding as an individual investor?

There are four key principles to focus on:

  1. Remember why you are investing
  2. The importance of diversification
  3. Time in the market not timing the market
  4. A reminder of the stellar returns investment markets have experienced

1. Remember why you are invested

Most people enter the share market to make money through annual dividends but also to see long-term capital growth.

Markets tend to move in cycles. Accept that downturns are part of the journey and don’t let short-term volatility derail the intended investment strategy. As I will detail further, investors who hold their nerve reap the benefits.

2. The importance of diversification

During periods of increased volatility in financial markets, maintaining a diversified portfolio is a key strategy in managing your exposure to risk. Investments can be diversified across different asset classes, industries and countries, as well as across investment managers with different approaches. The idea of diversification is to smooth your returns so they are more consistent and better for a given level of risk over the longer term. Investors’ asset allocations should be based on long-term historical data and market assumptions for the current market conditions.

3. Timing

The legendary investor, Peter Lynch, warned “far more money is lost by investors trying to anticipate corrections … than has been lost in corrections themselves”. The message here is that trying to time the markets is fraught with danger. While markets can face periods of rapid decline, history has shown that they eventually recover and move on to reach new highs. Investors with diversified portfolios who stayed with the market have seen their investments grow significantly – even through notable historical downturns such as the September 11 terrorist attacks and the global financial crisis (GFC).

4. A reminder of the stellar returns investment markets have experienced

It is important to stay focussed on what has been an exceptional time for investors since the GFC and, particularly, over the past 12 months to January 31, 2020. Even a correction of 15% would mean equity markets have still delivered a very healthy return over the past year.

Remember, whilst the market has experienced negative performance over the past week or so, the prospect of the injection of stimulus into economies has seen some sectors rally. Selling down after initial losses could possibly lead to missing some of the best gains in the future.

Our advice to investors is simple.

While we are experiencing a period of uncertainty, markets will most likely bounce back. History shows that investors who stick with a strategy based on diversified portfolios over the long-term achieve what they set out to do in the first place.

Ryan Fennell, Shane West and Jarrod Owen of The Fennell West Unit Trust trading as Fennell West are Authorised Representative(s) of GWM Adviser Services Limited ABN 96 002 071 749, an Australian Financial Services Licensee, Registered office at 105 –153 Miller St North Sydney NSW 2060 and a member of the National Australia group of companies. Licensee No. 230692. Any advice in this article is of a general nature only and has not been tailored to your personal circumstances. Before acting on this advice, you should consider whether it is appropriate having regards to your personal objectives, financial situation and needs.