Seeing Through the Coronavirus Crisis

March 31, 2020

The Coronavirus pandemic is dominating headlines – and investor sentiment. Above all, we hope that our customers and their families are keeping safe and well in the storm.

Clearly this is not your ‘typical’ crisis, with profound implications for short-term asset prices and the global economic outlook. But for some that can see through the volatility to the other side, this dislocation in markets can present opportunities.

There is an old adage that goes, “Be fearful when others are greedy and greedy only when others are fearful.”

The wrong approach

In recent days and weeks we’ve spent a lot of time speaking with our customers to understand how they feel about the Coronavirus crisis and its impact on their lives. Most understand the need to stay calm and focus on the long term, but some are reluctant to invest money in markets until they have stabilised.

This is a completely natural response – as asset prices fall there is a lot of fear and confusion. People become overwhelmed by negative news and panic can soon take over. Panic is not a strategy.

As we have always said, building wealth is about the long term. It’s not about timing the market from one day to the next – it’s about buying into a process that seeks to benefit from favourable long-term growth prospects in markets and sectors with good fundamentals. One crisis, however huge, shouldn’t change that.

Focus on time in the market

Here at Sarwa, we have always advocated “time in the market” over “timing the market”.

Even the world’s greatest investors struggle to buy and sell stocks at the right time. This is because it’s actually very difficult. In fact, research conducted since the 1970s has consistently shown that active investors have to be correct around 70% of the time in order to gain an edge over passive funds, which is practically impossible over the long run.

Looking back to the Global Financial Crisis of 2008, we saw dramatic falls in stock prices and the same kind of panic and groupthink. History suggests that the best way to respond to a financial market crisis is to avoid panicking and stay invested. In the 10 years following the fall of Lehman Brothers and the carnage that followed, the S&P 500 nearly quadrupled in value. Now of course, historical performance is not indicative of future returns. It just shows that being emotional can hurt your long term plans.

It might sound counter-intuitive, but the best course of action when markets are falling is often to do nothing. By sticking to your guns and resisting the urge to panic-sell, you are more likely to average out solid returns over the long run. If you have a steady income, a secure job, and hav time in the market – by continuing to add to your investments on a consistent basis, you will access buying opportunities at better valuations, helping to recoup lost performance. Warren Buffet likes to say, “Whether we’re talking about socks or stocks, I like buying quality merchandise, when it is marked down.”

This is easier said than done. But there are a series of practical steps that investors can take in order to overcome market volatility. We’ve blogged about them here.

The age of uncertainty

Right now, everyone is talking about Coronavius and it’s debilitating effect on markets. Some are waiting for things to stabilise before taking action with their investments. But it’s important to remember that there are other important events on the horizon that will add further complexity and uncertainty into the picture. In particular, the US elections will be hugely significant for investors.

We have always lived in times of uncertainty. Those who wait for markets to stabilize before getting on with their lives and their investments could be waiting a long time. The truth is, we don’t know what’s going to happen in the future – but we know from looking at the data that the market has delivered good returns to those who have remained invested over the long term.

Everyone is scrambling to make sense of the Coronavirus pandemic and what it means for them. Whether it’s loss of income, spiralling costs, damaged career prospects, or even the challenge of childcare and how to get through the day stuck in the house. Actively managing investments is not only time-intensive, it also demands mental focus and skill. The vast majority of people simply don’t have the time or bandwidth to do this, especially in a crisis.

How robo-advisors can help

Robo-advisors can help solve this challenge for investors.

Dollar cost averaging, an investment technique we discussed previously, can lessen the impact of volatility on your money. This means consistently investing into the market over time, optimising the average price you pay for your investments. Investing mechanically means you can take the emotional component out of your decision-making. By persevering with buying a certain dollar amount of your preferred investment irrespective of how wildly the price swings, price falls can present for some an opportunities to acquire shares at a lower cost.

For some, it is about avoiding bad timing. If you deploy all of your money at once in a particular investment, there is a risk that you’‘ll invest just before a big market slide. Of course, the flip side of this coin is that you might also miss out on investing at just the right time, before the market enters a bull phase. Success in investing isn’t about luck – it’s about having a sensible plan that reflects your risk profile and financial goals, and sticking to it.

Robo-advisors play a role during times of market stress, enabling you to stick to a Systematic Investment Plan and concentrate on what’s truly important to you at this difficult time. It’s about leveraging the latest technology to minimize the impact of your emotions on your investment portfolio and keep things on track.

Here at Sarwa we’re proud to be helping out customers through this difficult period, and enable them to focus on what truly matters.

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