Mark Lister

After beginning the year on an improved footing, the outlook for the global economy has been thrown into disarray by a genuine black swan event. It’s important that in periods like this we remain calm, take a step back, and remind ourselves of our overall investment objectives.

The immediate future will be rough for the global economy, financial markets and investors. News headlines look increasingly worrying, economic indicators have fallen off a cliff, and the outlook for numerous companies is uncertain.

However, one way or another, at some point things will get better. Maybe a vaccine will emerge, maybe the number of new cases will naturally peak or maybe financial markets will simply reach maximum pessimism. The latter could occur sooner than we think. Sharemarkets look forward, and often rebound long before we see clear evidence of improvement.

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During the global financial crisis, the S&P 500 bottomed out in March 2009, while the world was still in the depths of recession. A month later, US shares had rallied 26.6%. Six months later, they were up 52.7% and anyone waiting for proof things were getting better had missed a fair whack of the rebound.

Periods like this are uncomfortable for all investors (even those with many years of experience). However, we must remember that while asset classes like shares are excellent long-term investments, they can be very volatile over shorter periods.

Since 1950, US shares have delivered an average annual return of 10.7% per annum (including dividends), well above the inflation rate of 3.5% over the same period. During that period there have been countless declines, corrections, bear markets and crises. However, the market has a 100% track record of recovering, and surpassing its previous highs.

Owning shares in quality businesses that pay growing dividends remains an excellent strategy for wealth creation, not to mention inflation protection. While disconcerting, periods of volatility and weakness are simply the price we pay for superior long-term returns.

nz shares vs cash

Listed below are seven thoughts for surviving this challenging period – however it ultimately plays out.

1. This is when your adviser earns their keep.

The role of a good adviser is not to make predictions, provide trading ideas or to be a great stock picker. He or she will add significant value to your lifetime wealth by ensuring you maintain a disciplined strategy, talking you out of poor decisions you will be tempted to make during unnerving periods like this one, and reminding you of how best to achieve your long-term objectives.

2. Your goals haven't changes, neither should your strategy.

Most of us are investing in the hope of meeting our long-term objectives, which usually stretch many years into the future. With that in mind, it makes little sense to react to weekly, monthly or even yearly volatility. Investing isn’t about chasing the ups and downs of the market, it’s about managing a well-constructed portfolio in line with your goals and objectives. Play the long game, stay the course and stick to your strategy.

3. Keep your 'defensive line' intact.

Many investors have diversified portfolios, which means they also hold some cash, good quality fixed income and possibly even a small amount of gold. This part of your portfolio will have held its own during recent months and has probably even gone up in value. Your lower risk assets are doing their job, so there’s no need to sub them off.

4. Should we sell everything, ride this out then get back in later?

If markets fall further, selling up could be the right thing to do – but only if you’re good enough to get back in at the right time. If you’re a long-term investor rather than a trader, you might be better off just staying put. Corrections, bear markets and recessions will come and go, but great businesses often remain resilient, keep paying dividends and rediscover their former glory sooner or later.

5. Stay diversified, being at extremes is a poor strategy.

Investing isn’t about being ‘in or out’ of the market, contrary to what some might have you believe. Economies, markets and currencies ebb and flow, so hedging your bets across different asset classes, geographies and sectors is the safest route for most of us. If you’re fully invested in shares you open yourself up to the full force of volatile periods, but you’ll do your future self just as much of a disservice by sitting on the side lines and missing out on all the strong periods.

6. If you're an accumulator or a new investor, it might be time to start taking some risks.

If you need to cash up your portfolio and call on your money soon, periods like this are awful. However, if you’ve got cash to put to work or if you’re a younger investor, they can be a great opportunity. Prices could go down further, but we’ve already seen some hefty falls so it’s a good time to think about taking advantage. Be patient, take your time, and invest in instalments.

7. Stay calm, and don't panic.

It’s hard not to feel overwhelmed by all the negative news. However, we don’t make our best decisions when we panic. Stay calm, take a step back, and lean on your trusted adviser for support and guidance.


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This is an excerpt of an article first published in the April 2020 edition of News & Views. Craigs Investment Partners clients can view the latest edition of News & Views, which includes the full version of this article, by logging in to Client Portal.