One month ago, we wrote about the impacts of the developing situation with Coronavirus (COVID-19) on financial markets and the steps to consider to minimise the impact on your financial affairs. The situation is deeper and more profound than we could ever have anticipated and is causing a major disruption to our normal way of life.
Over this time the world has changed in many ways – but our advice remains the same - to ‘stay the course’ and remain invested. I wanted to explain to you why we continue to believe that this is the best course of action and what you can expect in the coming weeks and months.
We believe that market volatility will continue for some time to come. Last week, we witnessed a rally in markets – with headlines as desperate as they were at the time, who would have expected this? Markets are impossible to call and second guess. Doing so often results in costly errors, which we will work hard to prevent you from making.
The most common question that we have handled in the past few weeks is, ‘So for how long will this continue? How long will markets be falling?’. The answer to this question is that we simply don’t know, but we can look at history to give some indications. The average length of a ‘Bear Market’ (defined as fall in markets of over 20%) over the last century is surprisingly short at 1.3 years. Our experience tells us that the turnaround, and move to positive markets, is when we least expect it to be. Therein, lies one argument to remain invested and hold firm.
If you are a client of Atherton York your portfolio is highly diversified and will have some holdings that will be winners out of our current difficulties – consumer staple providers, healthcare, utilities and pharmaceuticals may all prosper from the current situation and deliver you returns. Your portfolio is not designed to beat or second guess the market, but instead to capture market returns when they arrive. Positive market conditions outlive falling markets at a rate of 6:1. (See graphic above).
There are three additional and wonderfully simple tips that we can offer you at this time to prepare better for the future and eventual turnaround of our situation:
1). Save More. Naturally, your spending habits will be changed during this period. Nights out will become nights in, meals out will become home-cooking and trips to the cinema will become an evening in front of the television. It is probable that your planned holiday will not take place as expected. All these adaptations and changes will result in financial savings and money in your pocket. As well as enjoying the company of your family during this time, calculate the savings that you make from these lifestyle adjustments and save this money for the future. Investment of the natural savings in your spending habits will offer you great value at present with lower market values. Regular and lump sum investments at this time will help to limit the damage that these events have caused to your existing funds. Any investment may just prove to be the very best ‘value’ that you ever obtain.
2). Reduce Income. If you are taking income from your portfolio or a pension income, consider reducing or suspending the income payments that you take as a reduction to your changed spending habits. If you need replacement income or capital, take funds from your lowest yielding asset, namely cash savings. Doing this will help you to anticipate the turnaround that will always come around and allow you to return to your previous spending habits when the situation allows. Taking income at a time when markets are falling creates challenges to the long-term sustainability of your funds. With savings rates at zero, you would be better advised to live off savings during this challenging period.
3). Reflect and Consider. Return to your long-term plan and remind yourself what and when you are investing for. For many, the longer-term plan will remain unchanged, and current restrictions on lifestyle are merely an inconvenience. For some, I suspect that recent developments may offer you a different insight on life and what is important to you. Charity, gifting to family or giving back to the community may be added to your plan – use this time to re-evaluate what is important to you. You most probably have a great deal of thinking time on your hands right now!