By browsing our website, you accept the use of cookies. Our use of cookies is explained in our privacy policy.
Click the PRODUCTS & SERVICES button on the left to expand it again.
Ok. Got itA long-term view and a level head remain key – we look at the economic consequences of Covid-19 that are likely to be with us for some time.
Wall Street Journal columnist and investor Morgan Housel said: ‘The majority of your lifetime investment returns will be determined by decisions made during a small minority of time.’ This is such a time. While the Covid-19 pandemic is first and foremost a global health crisis, the far-reaching economic consequences are likely to be with us for many years.
To a large extent, global investment markets have borne the brunt of this economic fallout. It's hardly surprising that participants in these markets remain fearful, given that a violent global recession is undoubtedly underway. And against the ensuing backdrop of indiscriminate institutional selling and full-blown panic, individual investors are understandably uncertain about the most appropriate course of action to take.
In South Africa, the challenges and fears were significantly amplified when the long-anticipated credit ratings downgrade from Moody's was announced on 27 March. And while the immediate impact of that was relatively muted thanks to the announcement largely being priced into markets already, the long-term implications for the South African economy are bound to be trying at best.
While the simple answer is to heed the advice of most advisors to remain as calm as possible and not make any knee-jerk decisions that you will regret later, the volatility seen in the markets points to the need for a slightly more nuanced response.
For one, it's imperative that investors understand the breakdown of their portfolios and recognise that the short- to medium-term performance (or lack of that) directly correlates to the weightings selected and diversification built into the portfolio. So, if a significant proportion of your portfolio is in risk assets, you are bound to feel the short-term pain of current market events more acutely than an investor with a portfolio that leans more towards risk aversion. That said, any effort to rush out of those risk assets now is tantamount to closing the stable door once the horse has bolted. And to take the analogy a step further, that closed stable door will not only lock out the horse, but will effectively lock in your losses.
The relatively good news for South African investors is that most of their portfolios have long been positioned for the worst-case scenario, given the structural constraints and economic uncertainty that have dogged our economy for years now. But while being positioned for a low-growth environment may have acted as a small buffer for investors, nothing could have prepared any of us for the severe impact that Covid-19 has had on global and local markets.
Of course, while there is nothing we can do to change the external market forces currently at play, we do have control over our own decisions and behaviours in response to these forces. And this is where managing our emotions plays such an enormous role. Put simply, emotions – and particularly fear – can easily get in the way of prudent financial decision-making. And the most effective way of protecting ourselves from these emotional decisions is to have a clear investment plan and to stick to it. Without a plan, investors are little more than rudderless ships, and are almost always tossed around by volatile markets, which inevitably has negative consequences for their long-term outcomes.
Of course, the other side of the emotion-driven investment coin is greed. The sell-off has been deep and, as a result, there are numerous stock-specific investment opportunities. However, rushing into any of these opportunities without comprehensively assessing whether they offer sufficient long-term return potential for the risk they still present, would be ill-advised.
At the very least, investors should be looking closely at every potential stock opportunity to determine whether there is likely to be permanent impairment to future company earnings because of changes to the organisation or the way its customers relate to it after Covid-19. In addition, the same rule still applies in terms of attempting to time the market, and that is ‘just don't’. Doing so, is not unlike gambling, in that it relies almost entirely on luck, and the stakes are extremely high.
The most valuable advice on investing in these volatile times is simply to maintain your long-term view. The two most recent market crashes validate the soundness of this guidance. During the global financial crisis in 2008/2009, markets around the world fell in the region of 40%, while when the tech bubble burst, markets fell around 35% from peak to trough. More importantly for those who retained their long-term investment views, the subsequent one- and three-year recoveries were 48% and 100% after the global financial crisis, and 43% and 207% over the respective time periods following the tech bubble burst.
Of course, no two market crashes are the same. And the adage about historical performance not being an indicator of future performance also applies to crash recoveries. The painful truth is that a global recession is pretty much a given. And when second quarter gross domestic product numbers are released around the world, it's going to be very difficult for investors to keep their fears under control and not make rash investment decisions. But they must. And while nobody knows how long it will take to fully recover from this recession, given the proven resilience of global markets, the chances are very good that they eventually will.
In the end, investors who have and adhere to an appropriate, long-term investment plan, with a correctly applied risk investment strategy that doesn't cause them to lock in capital losses due to emotional decisions, are best positioned to ride out the storm. And hopefully they will emerge on the other side of Covid-19 with a resilient portfolio that is well positioned to capitalise on the recovery when it comes.
For interactive, easy-to-read, and interesting investment insights, click here to subscribe to Nedgroup Investments Pulse. It is a monthly publication that provides investment professionals and clients with market and industry information.