Investing in some perspective
In the chaos caused by the coronavirus crisis, certain investment principles still hold true, writes Ian Campbell
The spread of COVID-19 and its effects that are causing uncertainty felt around the globe are unsettling on a human level, as well as from the perspective of how the world’s financial markets respond.
In the modern era, we have far greater access to news from around the world at the click of a button, or from flash news alerts on our phones. This is not always a good thing, as newspapers and websites tend to concentrate on publishing news stories that will attract the most readers.
It can be all too easy to focus on negative stories and get gloomy, disheartened or uncomfortable about the reported danger to life, society and wealth.
Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the coronavirus outbreak is causing governments, business organisations and individuals to reassess its impact on the global economy on a daily basis.
Apple announced a few weeks ago that it expected revenue to take a hit from problems making and selling products in China. Australia’s prime minister and other world leaders predicted the virus would become a global pandemic and warned of a serious blow to the global economy.
Airlines are grounding aircraft, largescale sporting and social events are suspended. And these are just a few examples of how the impact of the coronavirus is currently being felt.
Financial markets are clearly responding to any new information as it becomes known, but they are pricing in unknowns, too.
As risk increases during a time of heightened uncertainty, so do the expectations of returns investors demand for bearing that risk – which pushes prices lower.
At AAB Wealth, our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets. We can’t tell you when things will turn, or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns.
That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008-09.
Additionally, history has shown no reliable way to identify a market peak or bottom. Experience argues against making market moves based on fear or speculation, even as difficult and traumatic events transpire.
In turbulent times like these, financial planners play an important role. They are a source of fortitude, patience and discipline. They help clients develop a long-term plan that they can stick with in a variety of conditions.
Financial planners are trained to consider a wide range of possible outcomes – both good and bad – when helping a client to establish a financial plan and appropriate investment strategy. Those preparations should include the possibility, even the inevitability, of a downturn.
Amid the anxiety that accompanies the current developments surrounding the coronavirus, decades of financial science and long-term investing principles remain a strong guide.
It is important to remember that, in an efficient market, current world events and investors’ views are already factored into share prices.
As hard as it may be, we need to remember to keep our emotions in check, believe in the robustness of our portfolios, and continue on our investment journey with a long-term view. Future news may make the outlook brighter or gloomier. No-one knows.
From a personal perspective, these things are worrying, but from an investment perspective – as the legendary investor John Bogle used to say – “This too shall pass.”
Ian Campbell is a chartered financial planner at AAB Wealth
We need to keep our emotions in check, believe in the robustness of our portfolios, and continue our investment journey with a long-term view