The share market decline since the peak of 20 February 2020 has been fast and brutal.
Immense fear has now engulfed the market just like it has engulfed society through the perceived necessity to stockpile toilet paper. COVID-19 is undoubtedly impacting world trade with borders being closed and the world’s ability to trade normally being heavily curtailed.
In times of extreme market volatility like we are experiencing now, investors are faced with two choices:
1) Sell out and move to cash
2) Ride out the ‘storm’
Option 1 may feel like the safest thing to do right now but history has told us that this can actually do more harm to long-term returns than good.
This is due to the following:
1) As share markets can fall quickly, they can rebound just as quickly and getting the timing right to reinvest can be difficult. This may mean you ‘sell low and buy high’ which is the exact opposite of what is generally required to achieve strong investment returns.
2) If you are selling, someone is buying. For a trade to take place, there has to be a buyer and seller. Selling quality shares after they have dropped means someone else is buying that asset at a massive discount.
3) A well diversified portfolio includes exposure to ‘defensive’ asset classes such as fixed interest and cash. In times of market volatility, fixed interest assets can counteract market falls which smooths out the volatility and cash can provide liquidity to fund withdrawals such as pension payments.
The alternative is to ride out the storm and history has shown us that markets have always recovered and gone beyond previous highs. Whilst volatility may continue, our portfolios contain a mix of different assets and have been designed to weather such events.
If you would like to discuss your portfolio, please contact us.