Is now a good time to invest during COVID-19?

Is now a good time to invest during COVID-19?

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By Glenn Weston, Authorised Financial Adviser – 20th May 2020

It’s always a good time to invest for your future. However, this needs to be qualified because the answer is a personal one.

It’s yes if you’re a long-term investor growing your wealth for retirement because it’s smart to be adding to your investment portfolio now when share markets are down. Why? Because you’re buying the same quality assets at a cheaper price. And if you’re making regular contributions to your portfolio, you may also reduce investment risk as and when prices move up and down because you’ll “average” the cost of your investments.

If you’re a short-term investor, the answer may also be yes but with the proviso that because your investment horizon is shorter, you’ll likely want a portfolio that holds less shares and doesn’t bounce around as much when markets are volatile, such as we’re seeing now with the Covid-19 pandemic.

Maintaining investment discipline

As emotions can distort good decision making, a key role of your financial adviser is to help you identify emotional responses and guide you to stay the course with your investing. They will help you avoid knee-jerk investment decisions to both good and bad news, which is a common pitfall of investing.

Your financial adviser will also help you decide what sort of investor you are in terms of your tolerance and capacity to take investment risk relative to your goals and time horizon. Importantly, they will educate you about investment discipline and prepare you for times like now, when you might be tempted to make changes in the face of uncertainty when it’s least advisable to do so.

In the diagram below, consider where we might be in the cycle of investor emotions right now. You’ll likely think it’s somewhere between “It’ll pick up again” and “Damn it, I’ll cut my losses”. It would be a natural but emotional response to the current unprecedented environment and uncertainties that lie ahead. The consequences of acting on these emotions are likely to be significant to your future wealth.


Source of Chart: Saturn Advice

History shows that time in the market is more important than timing the market and so its crucial investors avoid one of their biggest mistakes, which is to assume a market trend (good or bad) will last indefinitely and not recognise it as part of a cycle.

The worst days in markets are often followed by some of the best days. The table below shows the impact of missing the best 10 – 40 days in the US share market over the 10-years to 31 December 2019, compared with being invested for the entire period.


Source of Chart: Capital Group


“Courage! We have been here before” [1]

There’s no shortage of commentary available attempting to explain the current state of the world with the Covid 19 pandemic and its economic impact. The speed and severity of the pandemic has had a significantly negative impact on world markets and many investors have become fearful of investing. We have seen record market volatility as the pandemic spread around the world with economic activity grinding to a halt in many countries because people can’t go to work.

Covid-19 ended the Bull Run for world share markets, which slipped into bear market territory in March 2020 for the first time in over a decade since recovering from the Global Financial Crisis. And while markets have made some recovery since, we can’t be sure we’ve reached the absolute bottom of this bear market yet. Markets react badly to uncertainty and no one knows for sure what the immediate future holds or how quickly we might recover from this crisis. But while we can’t predict the short-term, the longer-term is more certain.

Capital Group, a well-respected and successful international fund manager used by Saturn Advice, reminds us we have been here before. The cause may be different this time but the feeling of great uncertainty about the future is not. In a speech delivered by former Capital Group Chairman, Jim Fullerton, in November 1974 amid a prolonged bear market in response to the oil market shocks of 1973/74, he reminds us what we all know; that it’s always darkest before the dawn.

The “Fullerton letter”, as it has come to be known, is recirculated among Capital Group’s investment team periodically to remind them we have been here before and that, over time, financial markets have demonstrated an ability to anticipate a better tomorrow even when today’s news is or feels so bad.

We may be in uncharted territory with this current crisis and the immediate future looks very uncertain but it’s precisely when the backdrop looks so dire that markets can turn. We can’t be sure when that turn will happen in this cycle but, based on prior experiences, the market will turn eventually. Fullerton said “Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished”.

If you need help in deciding when to invest, give the team at Saturn Advice a call. We’re here to help you make the right financial decisions.

 

The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate personalised financial advice from a qualified Authorised Financial Adviser to suit your individual circumstances.

[1] Jim Fullerton, Capital Group Chairman, November 1974

 



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