The headlines scream panic, with doom-laden pronouncements about the stock market and the economy, not to mention the very real health risk to the public. Even the most experienced investor might have been surprised by the sudden falls in global markets that have reduced the value of people’s pension pots and investments in the past couple of weeks.
Images of traders’ screens turning red amid worrying statistics showing a rise in the number of people contracting the coronavirus worldwide – and in nearby communities – is enough to test the nerve of every investor.
Yet now is not the time to panic.
As respected investment guru Warren Buffett says: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”1
Investing for the long-term
There is no doubt that Covid-19 will have real and lasting impacts on the economy, as measured by global GDP figures. Global supply chains have been disrupted, consumption is falling as more people stay at home, and companies will struggle to increase earnings. Think of all those cancelled events and the impact on travel companies, entertainment and hospitality providers, and food and drink manufacturers. Clearly, this disruption will be felt.
Any yet while we don’t know to what extent these impacts will affect the economy, not to mention our broader communities and wellbeing, it is fairly likely that in the long-term it will be business as usual for the global economy.
When things eventually return to normal, it is true that all those missed cups of takeaway coffee, flights, sandwiches and movie tickets will never be recovered. But once those shorter-term impacts pass through, consumption will pick up once again – that is to say, people will begin living their lives in much the same way they were before Covid-19 took hold.
In some respects they may even see improvements. The price of oil has collapsed, which may lead to cheaper petrol prices, while people living in countries where the central bank has cut interest rates may see a reduction in their mortgage payments. Governments are also introducing fiscal boosts that may have an impact on the money we have available to spend.
In the same way, economies will also recover. The question remains whether the US, European or UK economy was poised for recession before Covid-19, or whether the coronavirus was merely the catalyst for a recession that was inevitable after the longest economic expansion on record. Either way, markets will eventually recover in the same way they have in previous decades.
So while it is perfectly reasonable that investors feel a degree of panic when crises take hold, it is also true that what can feel like an emergency in the short term may not hold as much significance 10 years down the line. Indeed, long-term investing helps smooth out the peaks and troughs of the stock market and can be a more successful strategy than trying to time the market.
A “buy-and-hold” strategy will enable you to take advantage of compound interest (when you generate earnings on previous earnings) to amplify returns, but it only works if you leave money invested and give it time to work.
But some long-term investors also invest regularly, drip-feeding money into their investments over time to benefit from “pound cost averaging”. This is where your cash buys a greater number or units or shares in an investment when prices fall, prompting higher investment returns if a recovery takes place. Simply put, in times such as these – when billions have been wiped off the value of companies – regular investors will be able to purchase more for their money.
Active versus passive
It is also the case that active fund managers have the ability to add value in both rising and falling markets, particularly the latter. Investors who passively track an index will see their investments fall along with the market in which they are invested, whereas an active manager will be working constantly throughout periods of volatility to ensure his or her fund adds value.
Selecting an active fund manager with a history of creating real returns is paramount to ensure investors stand the best chance of riding out stock market wobbles and creating wealth over the long term.
With the above in mind, investors with a sensible, well-diversified, long-term investment strategy in place should arguably try not to panic.