Financial markets, by construction, go up and down. This is how they have been built and how participants have been trying to benefit from them since their very first day in a London coffeehouse in 1773. Since then, while markets and their technology have evolved, the ground rules remain the same. Now over the last 11 years, we have been in a growing market environment, commonly referred to as a bull market. Once in a while, markets would fall a few percentage points, just to reach new summits few days later.
Coincidence? Yes and no, fundamentals behind markets had been supportive – cheap borrowing costs for companies (i.e. low interest rates) and supportive corporate tax regimes (particularly in the US) resulted in strong corporate earnings. On the other hand, when stocks dipped slightly, those buying were rewarded with the following increase in price. This boosted investor sentiment and participation in stock market.
Were markets too hot? Definitely. Did anyone expect them to fall that quickly? Probably not.
The COVID-19 outbreak sent markets into a tailspin
Every market crash is different. What’s striking here was the speed of the decrease. Let’s quickly look at some facts:
Most of us probably remember best the financial crisis that started in 2007. Back then, the crisis had been triggered by banks that had been too greedy and regulators that had been too lenient. We all remember too well how it ended.
This time though, we face a global outbreak of a virus. Never have we collectively faced such a challenge, so one can only speculate what the long-term effects on the stock markets could be.
If you looked at markets on March 15th, even assets that are generally poised to be safe haven in times of crisis, such as gold and bonds, were massively following. Cryptocurrencies, which some are seeing as the new gold, followed the same downward path, mirroring the “get me out of everything” investor mood.
Is it too early for hope?
At the time of writing, we have globally over 600k confirmed cases and a growing economic inactivity. As a consequence, we start seeing cracks in crucial supply chains, growing corporate layoffs and a tangible risk of mass bankruptcies.
Despite all the recent bad news, one should look with hope into the next few months. As described above, the rapid market decrease lets us hope that we have already bottomed or soon will hit the lowest point.
Across the globe, governments and policymakers are taking strong measures to ensure the survival of companies (you have seen all the unprecedented announcements, e.g. ECB to inject €750bn, the U.S. Senate $2tr). The US may even go further in offering “helicopter money” to their people, i.e. distributing cash to citizens so that they can pay for their utilities bill and still get food on the table. Since this Tuesday, we have seen some recovery on markets, but their evolution is very much dependent on how health care systems and their crucial supply chains brace the next few weeks. Stimulus, albeit welcomed, won’t work immediately, which will have undesired short-term implications. But the sooner the curve of confirmed cases flattens, the faster our daily economy can kick-off again.
But in the meantime, what does this situation implies for our own finances?
Let’s face it, most of us saw a decrease in value of our financial holdings. And if you are not invested yet, some friends or family members have endured this. In both cases, you will have associated the market crash with “losing money”. You would not be the first one to make this analogy. While it sounds about right at first, it’s only accurate in case you sell your financial assets. As long as you haven’t exited, the decrease in value is only in your deposit, i.e. hasn’t been realised in cash term.
As an investor in a falling market (or referred to as a bear market), your short-term decisions can have long-term consequences. So better think twice before selling.
We advise to consider the following points before acting too quickly:
- If you sell now, you will miss out the market recovery (markets ultimately always recover!).
- Don’t treat your investment account like an ATM. That’s why you should always have an emergency savings account to be used in times like we currently see.
- You should always recession-proof your financial life. This means that the money you decide to invest is not the money you will need if a recession hits, as by then it will be too late.
“Buy low, sell high” – but how does it work in real-life?
One of the main investment rules is to only sell once the price of your asset is high and only buy it when its price is depressed. While this sounds logical, it’s nearly impossible to pick the bottom of any market crash. The same counts for buying. An investor in an upward market may have the fear of missing out and as a result would still enter an overpriced market with the hope of further gains to be achieved. If we look at the current market situation, while prices recovered somewhat, you could still argue that they may crash again, so better not buy now. But what if this doesn’t happen and you only buy in 2 weeks’ time, then you will have missed part of the upside. Again, this is impossible to predict.
Too often investors want to control the pricing of an investment strategy, but they should rather focus on their investment horizon and the risk they want to take. Those are the only 2 real inputs you have as an investor on your strategy. You should manage your investment risk by keeping a long-term horizon, diversify your portfolio and keep adding funds to your portfolio. Don’t try to nail the perfect entry point, time in the market always beats market timing!
In the meantime, we hope everyone to stay safe and don’t forget, take care of your finances, of your loved ones and wash your hands! 😊