We want to take a moment here and update you on our thoughts related to the coronavirus and its impact on the financial markets, on your personal financial situation and ultimately why your long-term plan should remain unchanged.
Going into 2020, many stock markets around the world were trading near all-time highs but of course, markets don’t go up forever. Sometimes, they just flatline for a while and other times, they see sudden and significant drops that make big headlines, like “Black Monday” in the 2015 market drop or “Global Financial Meltdown” during the 2008 recession.
Unfortunately, we have seen that the Coronavirus has triggered a stock market sell off around the world. At the end of last week, major market indexes in the US, Europe, Japan, and Australia were down 10% or more from recent all-time highs, according to The Wall Street Journal.
A sudden decline can be distressing for investors, but this should not induce fear. It is purely a sign that markets are functioning as expected and intended. Markets are designed to handle uncertainty by processing all readily available information in real time.
The good news is, we can prepare for these short-term unknown situations by understanding our sometimes irrational human behaviours and turning to long-term investing principles and decades of evidence for guidance. Here are the most important things to be mindful of.
As humans, we are hardwired to react to situations that threaten us. In this situation, we have a double dose of fear. There’s the virus that has the potential to cause us bodily harm and the market reaction that can cause us financial loss.
Related to the virus, as an individual, we can’t control how quickly the global situation will resolve. All we can do is take the necessary precautions for our own health and hold out for it to pass.
Your reaction to the financial markets is something entirely within your control. We know it’s no fun seeing your portfolio drop in value. We must also remember that you never actually make a loss until you sell out of the market.
Market volatility is normal and expected. The key is to remain focused on the long-term picture.
Your investments are designed to support your long-term objectives, not today’s needs. Financial markets react to shocks to the system, just like we have seen now, just like we have seen before and just like we will see again.
There is no accurate or reliable way to predict a future market peak or bottom.
But from what the past shocks and crises have taught us, by taking on the risk of volatility in short term market shocks or downturns, you will be rewarded with positive expected returns in the future.
In situations like this, our job is to help you stay on track, to help you feel comfortable in the fact that sudden market drops are not unusual. Yes, the headlines are scary but they are designed only to sell news, not care for our personal financial situation.
We believe the best response is to acknowledge what you’re feeling, reach out to us if that would be helpful, so you have peace of mind that everything will be ok.
Sometimes, situations like this present opportunities for you. For example, as prices drop, we may have an opportunity to “rebalance” your portfolio. This means we might be able to “sell one thing and buy another” as a way to get your portfolio back to a desired mix that is most appropriate for your objectives.
Also, for regular investors, if your strategy remains unchanged during these times, you will be rewarded later by continuing to purchase assets at lower prices. You are able to by more units for the same amount of money. When the markets inevitably come back up over the long term, you will benefit more from this compared to if you had sold in and out of market.
Emotions & Algorithms
If we can change our mindset to accept that volatility will always be present in the short term and not react, we will have better long-term outcomes.
In today’s financial markets, many trades are made automatically by algorithmically driven computers. This leads to certain events triggering large sell offs or buys in the short term. As we have seen, emotions and fear also play a huge part in short term market behaviour.
However, long term market trends are a better reflection of the health of the economy. As investors, the challenge is to not let the difficulties of the short term prevent us from reaping the potential benefits of sound, long-term investing.
Here to help
Your financial well-being is our number one objective. If you have any questions about your specific situation, please contact us. We are here to help. Thank you for your continued trust and confidence.