It is clear that the coronavirus outbreak has already had a significant impact on people’s lives, and it’s also affected financial markets. How concerned should you be? Andy Jervis offers some guidance.
There are two aspects to this question. Firstly, what’s actually happening out there in the real world? Secondly, how should we respond to events within our own world?
What’s happening out there?
There is no doubt that coronavirus is a cause for concern. The unusually high level of contagion and the relatively high fatality rate make it likely that there will be many more deaths that can be attributed to the virus before we put it behind us. The fact that there are already a large number of deaths each year due to ‘normal’ flu doesn’t make the risk any less, and you would be well advised to take all suitable precautions. These have been well-publicised in the media, and it clearly makes sense to follow the advice given, especially if you are in one of the higher risk groups.
If you are especially concerned you should seek advice through the normal channels. You can find information about coronavirus on the NHS website here.
The effect of coronavirus on financial markets has been sharp and moderately severe. At the time of writing the FT-SE 100 share index of leading UK companies has fallen by approximately 20% from its peak in January, leading to much lower valuations of those companies. Economic activity has already been curtailed, and this will have a knock-on effect to profits and therefore future dividends, which in turn has caused this readjustment in share prices.
How should I respond to these events?
As your Financial Planner our primary aim is not only to help you to make good decisions around money so that you can be confident that you will achieve your goals, but also to help you to experience a sense of peace and ease around your money – and your life - that comes with knowing that everything is under control and working according to your plan. So let’s look at the facts.
Whilst the nature of coronavirus, together with the somewhat lurid reporting of its progress and effects in the media are worrying, the risk of contracting the virus remains small. Of those who do contract it, 80% have a mild infection with no lasting effects. The outbreaks of SARS and MERS viruses, whilst infecting less people, have been significantly more dangerous in terms of the numbers of people who died as a result of contracting them. The risk is probably a lot lower than you think it is.
Talk of falling markets and economic contraction are also worrying, and the declines in the leading share prices are real. However, if you are invested in one of our portfolios then you will not have experienced the same level of declines.
Have a look at the chart below. This shows the actual performance of a random selection of our clients' real-life portfolios (the blue line) after deduction of all costs, compared to the Morgan Stanley UK Capital Index, a measure of UK stock market performance (the red line) which does not allow for the costs of trading and managing the investments it contains. Whilst our clients' money has reduced in value from its peaks, it hasn't suffered anything like the damage of a pure stock market portfolio, and remains in positive territory on a 12 month view.
Our Investment Team have been positioning our portfolios in anticipation of a decline in markets for some time now, and your investments include a range of high income and low volatility assets that have been designed to reduce the investment risks that you face. We take our clients financial security seriously, and this means that we have been able to protect you against the worst effects of these events, both by selecting suitable investments but also by ensuring that we have a clear understanding of your future goals, cash and income needs so that we can agree an appropriate cash reserve designed to enable you to ride through these periods of increased uncertainty.
Investment market volatility is nothing new. This isn’t the first time that prices have fallen rapidly, and it won’t be the last. I'm old enough to remember the 1987 crash (22% fall in 2 days), the 1990's tech bubble, the 2003 collapse, and of course the 2008 banking crisis. In every case the market recovered strongly as the impact of the events receded, despite some pretty scary headlines throughout and lots of market volatility and uncertainty. Accepting this volatility is part of the necessary price that must be paid in return for the possibility of higher long-term returns, and it goes with the territory. But the overwhelming evidence is that remaining invested for the long term does bring its rewards, and remains the best response to such events.
Our Medium Risk Portfolio Fact Sheet (available on request) shows that in the period from 1 January 2007 to 31 December 2019 the FT-SE 100 index fell from its peak by 44.5% at its lowest point. However, although the returns in individual years varied significantly, throughout that period the portfolio achieved a return of 7.4% a year on average after all costs. Bailing out at the worst possible time is almost certainly the wrong thing to do.
What is your mind telling you to do?
I’m personally a great believer in the power of our minds to come up with an answer to problems, and intuition and ‘gut feeling’ are underestimated tools. Unfortunately though, when it comes to many of life’s situations they are also often seriously wrong. There is plenty of research to explain why, when left to their own devices, people make bad investment choices, and it is at times like these when having an adviser who understands the emotional impact of scary news can be hugely valuable.
Faced with the media onslaught of unrelenting bad news about the onward march and apparently devastating effects of coronavirus, it’s understandable that you will be concerned and might decide to curtail your activities. Sometimes this might be sensible, but it might also be a severe overreaction caused by a perceived threat, the actual risk of which is tiny. Humans are not good at estimating risks, and often we make decisions based on our perceptions which can be very different from reality.
The media isn’t helpful in this regard. I attended a presentation a few years ago at which a former TV news personality explained that, typically, the news media features 17 bad news stories for every 1 good news story. This ratio is maintained because the news people know from their audience measurement that it is the optimum ratio to keep people viewing and/or reading. Despite the public often asking for more good news items to be shown, the fact is that we tend to lose interest when the bad news diminishes. In the latest cycle we have seen an overwhelming press focus on Brexit, followed by weather and flooding, and now coronavirus. Whilst these have clearly been important issues, the media has managed to wring out every last element of bad news from each of them. In this respect we are being manipulated and we don’t even know it. Bad news is a drug habit that requires constant feeding. Don’t become an addict.
One of the dangers is that bad news can become self-fulfilling. If we are concerned about the economic damage caused by our responses, it doesn’t make sense to withdraw from your normal daily activities. If you have a holiday planned, cancelling it might make you feel better but it isn’t helping the airlines or the travel companies. Putting your spending decisions on hold will, in itself, contribute to an economic slowdown. Think carefully before you act irrationally.
The world of money and investing is especially vulnerable to poor decision-making. One reason is that people tend to make positive decisions when they feel good, and when they have seen and experienced the benefits of their actions. For example, you’re much more likely to book a holiday immediately after you’ve experienced the last one and are basking in the glow of your memories. Similarly, you are more likely to commit funds to investments when they are riding high and you or others seem to be making profits. Putting money in when it appears that the whole world is collapsing goes very much against our mental wiring, but of course the very best time to invest is when prices are low. It just feels all wrong.
So what should I do now?
One thing that doesn’t change is our core advice. In summary, this is to;
· Be clear about your goals and spending needs and ensure that you have enough cash set aside to meet them;
· Invest in accordance with a properly constructed Plan designed to give you the highest probability of achieving your goals;
· Accept that the ups and downs of investment markets are normal behaviour, even when they seem to be extreme;
· Turn off the news.
As always, your Financial Planner is on hand to talk things through with you if needed, and if your goals or circumstances have changed, or you just need a listening ear, you should get in touch.
If you have any observations you would like to share with me directly, you can contact me at firstname.lastname@example.org.
Chairman of Chesterton House