How should we be investing in Covid times? Has Covid changed how investments work and do you need a new strategy?
In this article we will look at what happened during the ‘Covid Stock Market Crash’ and whether the traditional equity/bond investment mix worked.
How scary has investing in Covid times been?
January 2020 was a pretty good start to the year for the global stock market and good performance continued into February. But towards the end of February, as travel advice changed and we started to learn all about lockdowns the stock market took a tumble.
As you can see from the chart above the global stock market reached a low point around the 20th March 2020 falling 25% from its February high.
What’s always scary during a stock market crash is the speed at which the falls occur. This is what panic can do.
What we can also see from the chart above though is that for those who held their nerve, the market recovered quite quickly and once news of the vaccines was announced the falls have been recovered and turned into some very good gains.
But of course for most people, it is unlikely 100% of your portfolio is invested completely in the stock markets. You will likely have a mix of stock market investments, called equities (generally higher risk/higher growth) and bonds (generally lower risk/lower growth).
This is how most default pension funds will invest and hopefully you have chosen an overall level of risk that is appropriate for you.
There has been talk recently that this traditional equity/bond portfolio is no longer up to the job, especially when investing in Covid times.
Let’s explore this a little further.
Do you need to change your investment strategy for investing in Covid times?
Going back to equities and bonds it might be useful to remind ourselves what the terms mean.
Equities are shares in businesses. The name comes from the fact you own equity in that business.
Through your ISAs and pensions you might own equities via a direct shareholding in a company or via units in an investment fund.
Bonds are loans to governments and businesses. Governments and businesses always need extra capital to invest so they usually request loans and agree to pay a fixed level of interest.
Due to the size of these types of loan you will most likely own units in a fund that invests in bonds.
Bonds are deemed lower risk because the interest from a bond is usually fixed, governments can always print more money to return your money and bondholders must be repaid before shareholders if a company gets into trouble.
Having a mx of equities and bonds in your portfolio has worked very well over the years because typically as the performance of one goes up the other goes down and vice versa. So it helps to reduce the overall risk of your portfolio.
Before Covid, there had been talk that holding bonds was no longer as effective. The reason for this is because interest rates have been so low they now only have one way to go and that is up. That could be damaging for bonds because the price of a bond and its interest rate are usually at opposites. If interest rates are low, prices are high. If rates go up prices will fall.
Let’s look at what happened when investing during Covid times.
The table below shows 3 of our RTS Tracker portfolios. Each portfolio has a certain percentage allocated to equities and the rest to bonds.
|RTS Tracker 20% Equity Fund||RTS Tracker 40% Equity Fund||
RTS Tracker 100% Equity Fund
Value before the drop
(Performance 1st Jan 2020 – 20th Feb 2020)
(20th Mar 2020)
Max percentage loss
(20th Feb 2020 – 20th March 2020)
(days it took to get back to pre-drop value)
|118 days||145 days||188 days|
(1st Jan 2020 – 31st Mar 2021)
What’s interesting here is that even the lowest risk portfolio (20% equities) is still not immune to crashes and fell around 12% from the high point. But this was much less when compared to the 100% equity portfolio that fell nearly 28%.
So already you can see the risk reduction of bonds in action.
What’s even more interesting is the time it took the different portfolios to recover from the drop.
The 100% equity portfolio with no allocation to bonds took 188 days to get back to where it was before the Covid crash. Whereas the much lower risk 20% equity portfolio took 118 days. Over 2 months shorter!
So clearly the equity/bond mix worked again like it always has to reduce risk.
Now we are not saying everyone should be invested in the 20% equity portfolio. Far from it, because if you look at the performance since the crash up to more recent times you will see that the 100% equity portfolio has far outperformed the 20% equity portfolio.
You just need to understand what mix is right for you. This comes from an assessment of what you need to make to achieve your objectives and the level of volatility you are comfortable with and can afford to take.
Even if interest rates were to go up and prices of bonds fell we still believe the overall return, which will factor in the higher interest rates, will still be appropriate so that bonds can do their job in your portfolio.
You just need to remember that bonds are a defensive asset. They are not in your portfolio to deliver growth but to reduce your risk.
Equities are the growth asset.
Determining the right asset mix is the most important part of investing and will have 90% of the influence of how well your portfolio performs. It’s vital you get this right.
If you would like a Chartered Financial Planner to assess your position so you know exactly where you stand and what you need to do next then please contact us.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.