As COVID-19 continues to spread rapidly across continents, the situation has developed like nothing we have ever seen before. This has resulted in global investment markets responding in their typical way, creating uncertainty and unease for individuals with money invested.
In this blog, we provide an outline of the current market situation, what this means for your investments and what you should do about it.
The current market
Through impacting supply, demand and profitability for organisations all over the world, the introduction of coronavirus has caused stocks across the globe to fluctuate in value. The FTSE 100 Index is the most widely-recognised measure of the UK stock market and is seen as a barometer for what is currently happening.
Increasingly in today’s global economy, one country’s stock market will be linked very closely to another’s – what happens in China matters here, what happens in the US matters here, what happens here impacts on the rest of the world. Whilst the FTSE 100 is made up of the largest UK-based companies, over 70% of these derive their income and profits from overseas, and of these, over 70% derive their income in dollars, meaning that the exchange rate also plays a key part. A rising dollar can mean that dollar profits are amplified when returned to a UK company and so it has been said that the FTSE 100 is equally influenced by currency as the shares of the companies it comprises of.
With all of these factors in mind, and COVID-19 now being recognised as a global pandemic, it’s no surprise that both the UK and international markets have reacted in the way they have.
What does this mean for my investments?
The FTSE100 has seen a drop from 7,604 points on 2 January to 5,446 (as of 24 March), translating to a drop of 29% with an in-day gain of 9% today.
Here lies the fundamental issue with investing on the markets – whether that applies to shares you own or the investment funds that sit within your pension or investments. More often than not, it is a case of “time in the market rather than timing the market”. There are many studies that show the highest daily gains come on the back of the largest daily losses. Quite simply you have to take the rough with the smooth – holding cash may protect you from the snakes but it doesn’t give you access to the ladders.
To then appear immediately contradictory, there are ways you can dampen the volatility of your investments, based on your attitude to risk and your asset allocation. Put simply, the four main component parts within the majority of pension and investment portfolios are as follows:
– Fixed interest securities (such as government gilts)
All will behave subtly differently in differing market conditions, and the diversification that they bring will not prevent you from an unwelcome haircut, but can reduce the chance of losing your head from your shoulders – think hair scissors or axe! A wisely selected and balanced portfolio will still fluctuate but less so than shares alone and definitely less than the FTSE 100 Index. To prove the point please see the below image:
The red line represents the benchmark for a ‘Cautious to Moderate’ portfolio, the green line a ‘Moderate to Adventurous’ portfolio and the blue line is the FTSE 100 Index – all over the last three months. On that basis, the doom and gloom we have been subjected to in the press doesn’t paint the full picture. Look at a longer time period (one year) and the volatility is dampened further:
Push out to five years and the figures look different again with the blended portfolios in positive territory:
The below screenshots (taken from Vanguard) also give a clear picture of how investing for the long term can produce very different results than investing over a relatively short period of time:
So what should I do?
We recommend that you follow the instructions dispensed from the Government and stay in, both at home and in the markets.
Never in history has such resource been directed at protecting health and economic stability around the world. Monetary and fiscal policy rulebooks have been torn up in recognition of the scale of the challenge, and the numbers behind some of the stimulus packages are eye-watering as Governments show the markets and world that they are willing to bear the burden of some short-term economic pain in order to rebuild confidence.
We can continue to expect volatility and overreaction in the market but this isn’t new. Investment fund managers will be picking up bargains and tweaking their asset allocation to benefit from the recovery.
It has been said that the chances of V shaped recovery are lower than those of a U shaped one, inferring that the ascent won’t be as quick as the descent. However, now is the time to speak to your financial adviser (or to engage one for that matter), to ensure that your monies are suitably prepared for your financial future and you know where you are navigating to.
For further advice, please contact a member of our wealth management team on 01254 679131 or via email at firstname.lastname@example.org.
This information is correct as of 24 March 2020. This blog is for general guidance only. Recipients should not act upon any of the information provided without seeking specific professional advice tailored to your circumstances, requirements or needs. Please contact PM+M before making any decisions based on any matters relating to this blog. PM+M Wealth Management Limited is authorised and regulated by the Financial Conduct Authority.