HOW TO INVEST IN A CRISIS

Investment & Wealth Advice




How to invest in a crisis

“Rather than focus on the day-to-day ups and downs of the stock market…it’s far more important to focus on the things you can control.”
 
With global markets in the grip of the COVID-19 pandemic, investors face an impossible dilemma – whether to stay invested or to withdraw to a safe haven. Ollie Barnett, Associate Director, explains why it’s better to keep calm and carry on.

What is happening in the markets?

Covid-19 is unlike any crisis we’ve faced in living memory. As well as the terrible cost in lives, the measures taken to combat the spread of the virus mean that the global economy is facing an even more extreme downturn than that seen in 2008. 

Unsurprisingly, stock markets around the world have sold off heavily. While some companies are more resilient to the disruption than others, entire industries – such as travel and eating out – have effectively been shut down, while consumer spending has collapsed. Earnings for many companies will be far below expectations and it’s not at all clear when or if ‘business as usual’ will return for many of them.

What does this mean for investors?

The classic point made by financial advisors at times like these is that what matters is ‘time in the market, not timing the market’. You’ll often see historical studies stating something to the effect that if you’d missed out on just the 10 or 20 best individual days in the stock market over the last 20 years, then your average annual return would have fallen sharply. The lesson is to make sure that you stay invested at all times. 

These are telling illustrations, although they often neglect to point out that the market’s best days tend to come along during the same periods as its worst days (indeed, we’ve already seen some of the most extreme rallies in stock market history during this particular downturn), which means anyone who missed out on the best days would almost certainly avoid the worst as well. 

 

However, the overall argument remains compelling. And in any case, there’s a more straightforward reason to adopt a buy-and-hold strategy, and it’s this: timing the market is virtually impossible. 

What are the alternatives to being invested?

Rather than asking ‘should I remain invested and continue to invest regularly?’, it’s worth inverting the question, and asking ‘what’s the alternative?’ The alternative is to sell when you believe the market is at its high, and then buy back in when you think the market is at a low. So you have to get not just one, but two major decisions right.

Not only that, but you have to do it at a time when emotions are running high, and the papers are filled with analysts expressing views ranging from profound pessimism to blithe optimism, all of them equally convincing. 

The reality is that no one knows if we’ve already seen the bottom of the market, or if there is worse to come. On the one hand, it’s perfectly possible that we’ve seen the bottom. Markets look to the future rather than to the present – for example, during the great financial crisis, stock markets hit rock bottom in March 2009, even although the economy was still mired in recession and the headlines remained grim.   

On the other hand, there are many unknown factors – perhaps it will take longer to escape lockdown than investors currently hope, or perhaps there will be further waves of the virus that result in any recovery being weaker and more drawn out than expected.

Tempted to try to time the market? Don't.

If you are still tempted by the idea of trying to time the market, bear in mind that even professional fund managers – who are paid handsomely for their efforts, and are studying the market on a daily basis – struggle to beat the market on a consistent basis. This is one reason why cheap market trackers have become so popular in recent years.

So what should you be doing instead? Warren Buffett, arguably the world’s most famous investor, has argued that you should, ‘Be fearful when others are greedy, and greedy when others are fearful.’ But you don’t have to do anything complicated or clever to follow his advice.

Simply making regular investments in the market enables you to do this on autopilot. If you put money into the stock market over time, then when share prices fall, your regular sum will buy more of them. When they rise, your regular sum will buy fewer. This is sometimes known as ‘pound-cost averaging’, and it’s a way to sidestep your own behavioural biases and ride out market volatility without having to pore over the financial pages every day.

Be focused and ignore the noise

In short, rather than focus on the day-to-day ups and downs of the stock market and the worrying headlines that go along with it, it’s far more important to focus on the things you can control – including your cost of investing, your asset allocation (sensible diversification is also vital to riding out downturns), and having a detailed understanding of your long-term financial goals. Weatherbys can help you to put together a financial plan that will take account of all of these things – get in touch to speak to a financial planner today. 

Can we help you?

"There have been crises before, and there will be crises again. But buy-and-hold investing has still served investors well.” John Butters, CIO. If you are interested in finding out more about our Investment and Wealth Advice service and how we can help you, please click here to contact our team who will telephone you back to discuss your needs.

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Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.