As the situation intensifies with regards to the Coronavirus I thought it right to provide a further update on how stock markets are reacting, what’s happening to your investment portfolios and how we should react.
A reminder of what the stock market is
The stock market is a collection of the world’s greatest businesses. We as investors can buy into these great businesses on a daily basis through the stock market.
Stock market indices like the UK’s FTSE 100 and the US’s Dow Jones represent a collective sample of businesses from one particular country.
The stock markets move up and down based on one thing alone and that is investors’ expectation of future earnings from these great businesses.
If they expect future earnings to fall, the stock market will fall. If they expect earnings to rise, then the stock market will rise.
Therefore an index like the FTSE 100 is a predictor of what investors feel is likely to happen to an economy. Sometimes looking 1-2 years ahead. When all news and events are known the stock market will go up and down fairly slowly. When unpredictable events hit (like the Coronavirus) it sends the stock market into panic as investors did not predict it.
It takes some time for investors to react to this information and re-adjust their predictions.
What has happened in the past
Whilst what we are currently going through may feel like nothing before, there has been various crises (some of them you may remember) over the history of our great planet including:
- The Great Depression – 1930
- World War Two – 1939
- UK Bailout by the International Monetary Fund – 1976
- Black Wednesday – 1992
- September 11th Attacks – 2001
- Global financial crises – 2008
The picture below from https://www.timelineapp.co/ shows just how remarkable and robust the stock markets and great businesses of the world are.
The worst fall the UK stock market has seen since 1900 was the great recession of 1972/3 when stocks fell 67% over a 2 and a half year period.
What followed was nearly 13 years of growth and a stock market return of 3,514%!
There have been 16 bear markets (when the stock market drops by more than 20%) since 1900 and 103 bull markets (when the stock market rises by more than 20%).
On average a bear market (falling market) will last 1.3 years and a bull market (rising market) will last 7.9 years.
What to do now
The first thing to do is revisit your financial plan. If that has not changed then there is no need to change your investment strategy. Our client’s portfolios have been built with these types of stock market falls in mind. We always knew an event like the Coronavirus would happen. We just never knew when.
In my last message I wrote about what your portfolio will be doing behind the scenes to limit your falls and supercharge it to growth once the world recovers.
I just want to share one further article with you for now. This is from Foxy Monkey and you can read the full article here.
It explains that Bob, an investor who has the worst luck ever, only invests just before every US stock market crash. He starts in 1972.
By the time Bob retires in 2013. Guess how much he has made on his investments?
So the advice is very much to hang tight.
As I’ve said previously my own family money is invested the same way as our clients and we too have felt the pain of seeing the value fall. The government has said it will do whatever it takes and as a student of finance and history I truly believe we as humans have the right ingenuity, science and capitalism to get through this.
As always I am available to my clients to discuss any concerns they have and if you are not a client or know someone who is struggling with the current impact on their pension and investments then please pass them my number.
As a company we have Coronavirus contingencies in place. We are able to meet all clients virtually via Skype/Zoom and are fully operational working from home securely. We have also reviewed the Coronavirus polices of our recommended investment partners and we are confident they are all secure.
So it’s business as usual from 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.