WEALTH To Buy or Not To Buy
INVESTORS HAVE NEVER FACED A PANDEMIC AND ECONOMIC COLLAPSE AT THE SAME TIME. PETER GUY OUTLINES THE ISSUES THEY MUST CONFRONT
Prosperous business people and investors are learning hard lessons in today’s markets and economies about the difference between possessing wealth versus liquidity. Understanding and managing risk as the world is trying to emerge from a pandemic and recession has never been harder. Never before has discerning between risk and uncertainty been more difficult and yet vital.
Clinging to survival on the sidelines by holding your entire portfolio in cash is not sensible in a low-interest-rate environment. Avoiding investing in equities because you think you’ve missed a market peak or trough is frustrating in a market that persists on setting record highs and returning to them despite horrific economic news. The humiliating hazards of competing against a financial bubble lies in its habit of making fools of people who are in it and then sell too early, or others who missed it by being too timid to get invested.
It looks confusing as markets appear clueless in pricing risk. Welcome to 2020, where there’s no mass audience, no investment consensus. Everyone’s quarantining at home, deep in their own mental silos unable to discern global trends.
Today’s avalanche of data, information and advice streams effortlessly through your mobile devices. Then, hordes of financial advisors, friends and private bankers make it all too easy for you to avoid cultivating your own thoughts, actions and decisions – all relative to your personal risk preferences, life goals and ambitions.
Speculative trading with a small part of your portfolio won’t generate outsized returns for your total wealth because you aren’t dealing in meaningful amounts. Worst of all, it breeds short-term gaming and investment thinking. It’s counterproductive towards developing long term portfolio and wealth planning. As gamblers mock, it isn’t truly high-stakes poker unless you risk selling a kidney in Shenzhen or losing your house.
The biggest mistake a person can commit during the coronavirus pandemic is not taking advantage of events. No one can influence events like recessions, disease outbreaks or how governments handle them. That governments decided to lock down their populations and collapse their economies instead of keeping them open is outside of most investors’ control.
So what’s changed as a result of coronavirus? Consider these dramatic shifts that can drive your portfolio strategies. Interest rates are even lower now. And when combined with more quantitative easing, risk-free rates and price discovery, they’ve continued to be distorted since the global financial crisis in 2008. Quarantining has advanced the digitalisation of life even more quickly than the
previous trend. Taxes will probably increase in most developed countries to cover the debt generated for economic recovery. Political eruptions and new governments will begin to rock markets.
It makes perfect sense to exploit these trends by investing in financial assets that return at rates above inflation, unlike your bank deposits. Markets are made of people who react in fear to scary moments like 2008 and March 2020 by panic selling their investments and then panic buying. Then, there are those who are disciplined enough to remain calm, stay the long-term investment course and even take advantage of events. Those who are always scared never seem to profit and grow their portfolio over the long term.
The online world has accelerated the growth of already large technology companies, such as Amazon and Zoom. In the worst part of the coronavirus crisis, some investors panicked and sold stocks while others saw falling markets as an opportunity. Markets always bounce back, especially in the US. However, this requires an abiding belief in capitalism, markets and equities.
Investors should run their portfolio as a business enterprise, not a provider of raw material for online trading platforms. Be a collector, not a trader of equities and use any falling market prices to build a significant position. There is only one reason why you shouldn’t invest – if you can’t deal with daily volatility and its precipitous declines and waves of panic selling.
Most do-it-yourself investors invest badly. But, investing in funds isn’t necessarily a simple solution to learning how to invest. Working closely with your financial advisor or private banker on developing the appropriate investment opportunities is the best way to gain experience – especially in times of uncertainty. Remember that times have always been uncertain.
It still makes sense to buy quality, blue-chip stocks at reasonable and attractive valuations. Research from Vanguard, covering almost 160 years of market history in the US, the UK and Australia, demonstrates that time (holding over the long term) in the market is a more successful strategy than timing the market.
Over these 16 decades that covered a broad range of economic cycles, political tumult and event-driven uncertainties, investors generated better returns being fully invested 65-70 percent of the time rather than trying to time one of the market’s periodic, healthy, and normal pullbacks or declines. Conversely, 30-35 percent of the time, investors who could successfully time and buy into the market made even stronger future returns.
“All money is a matter of belief,” said Adam Smith. Yes, the future is dark and murky, but it does come and the spoils go to those who figure it out. You have to find your own method in the market madness. And don’t forget, the danger is greatest when absolutely nothing makes sense.