How to protect your nest egg as COVID-19 challenges keep coming.
This is a challenging time for investors. While stock markets have recovered from their late March 2020 lows, there are signs the impact of COVID-19 and nervousness about the US election are worrying markets.
The S&P/ASX200 index has fallen in each of the past four weeks. The tech stocks that have run the hardest and supported the broader index have spluttered with a 10 per cent correction in the NASDAQ in the past two weeks. The market is facing the reality that a vaccine is unlikely in 2020.
Here are four things to help in navigating the sea of news.
Steve Wendel, head of behavioural science at financial services company Morningstar, says, “Take responsibility”
How we respond to the coronavirus matters.
It’s not what other people do in times like this that create problems, it’s what we do. There are no ‘other people’. It’s true for our investments, and it’s also true for our mental health right now.
Panic is a social phenomenon, whether it’s panicked selling of investments or panicked buying of hand sanitisers. Sure, there’s an underlying trigger, but our actions and our tone have the power to either turn that trigger into a crisis or into a blip that we quickly see in the rear-view mirror.
Personally, as a contrarian investor, I try to identify buying opportunities when there’s a down market. Rebalancing as a tactic also helps counter the crazy. By buying when others aren’t, we help limit the carnage, in our small way. And that helps real people avoid potentially dire situations.
As many studies at Morningstar and beyond have shown, people lock in their losses by pulling out at the bottom of a down market. It’s not the stock market decline itself that hurts them per se. It’s that they exit and then miss out on the subsequent market upswing.
That’s a serious loss for retirees living off their investments or young families planning for their first house purchase. It means cutting back, living on less, and perhaps not even being able to pay the bills.
Buying when others aren’t helps decrease the chance that people will panic and pull out, and it softens the blow if they later do. Keeping our heads and thoughtfully evaluating our investments means, ever so slightly, smoothing things out for everyone else.
Ian Tam, director of investment research at Morningstar, says, “Use volatility to point you in the right direction”
Use the volatility that you've seen in your portfolio as a gut check. If you feel that your portfolio value has fluctuated too much, that probably means that you're taking on too much risk.
Consider using all the attention and energy that the market turbulence has brought out in you to reconsider your risk tolerance and recalibrate your long-term asset allocation decision, or the mix between stocks, bonds and other asset classes. Ensure it's appropriate for the level of risk that you can comfortably take on as opposed to making a short-term tactical change in your portfolio.
Ian Tam also says, “Do not try to time the market”
Although it sounds easy, pulling out of the market and then waiting for a correction is something that very few people and investors can do effectively and consistently.
My colleagues, Drs Paul Kaplan and Maciej Kowara have authored a few papers around this topic. For one, they ran a study of about 304 Canadian equity funds over a 15-year period ending in October 2018 and found that on average, there were only eight critical months of performance that a fund's history depended on to beat its own benchmark. Of course, if you weren't invested during those critical months, you, too, would have failed to beat the benchmark.
So, investing early and staying invested over the long term is really the only way to ensure that you catch these critical months. The path to financial freedom is a marathon and not a race.
Andrew Willis, Morningstar content editor, says, “Use time to your advantage”
The airwaves are saturated with coronavirus coverage. Buy, sell, hold, don’t panic, panic, get supplies, wash your hands. What should you do?
Only time will tell what the best moves were and when, but one thing that we strongly encourage at Morningstar is that you use time to your advantage. That means first avoiding ‘undoing’ the power of time in your portfolio by panicking.
Quality investments have seen dramatic drops in value in the past, and they’ve recovered. And depending on your retirement goals, that may mean that the red you see today could be a flashing buy sign for certain stocks in the long game. You won’t know when markets hit the bottom, and you won’t know when a bump is a bull trap.
Go with what you know. The rules you set for yourself and the power of compounding and diversification remain constants amidst the chaos. Pair this with reliable sources of information and you’ll find less of a reason to panic about your portfolio when it comes to this pandemic. Save your energy to focus on what matters most: the health of you and your family, friends and neighbours.
Have you been heeding the advice to sit tight and wait out this volatile period? Or did you concede that your investments needed more balance?
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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.