This week we have seen the market/s fall by approximately 10%, the worst weekly fall in the markets since the Global Final Crisis (GFC) on the back of fears about the coronavirus and its potential impact on the world.
So, the question that I have been pondering, is this the beginning of the end?
Now, of course I am not bold enough nor do I profess to have the knowledge to predict that this episode on the market is the beginning of the end and unfortunately I don’t have that crystal ball we would all desperately love, which tells us what happens next.
However, it is hard not to be swept up by the hysteria in the news. Subsequently it is easy to start to believe that the worst is about to happen however statistically speaking it rarely does. Leigh Sales book, Any Ordinary Day really opened my eyes to human emotion in negative circumstances, in fact in Leigh’s book she anecdotally suggests that our brains are wired in such a fashion to fear the worst possible outcome and in fact we relish in this fear and negativity.
Naturally, no one wants to live in a world of fear however if you take a moment to self-reflect, I am confident most of us will find that our emotions are greater in negative situations as compared to positive situations. The reason I share this with you is that in times like now, investing can test the resolve of the very best and it is therefore understandable why some people will fear the worst.
Therefore, in the absence of holding ta crystal ball, how do you deal with market volatility and hysteria?
For mine, the answer is easy, check in your investment goals and consider the market movement in the context of what you are trying to achieve. For example, if you are a retiree, and your major objective is to generate a consistent income stream from your portfolio, the question to ponder is, have you planned for a market correction in your retirement income stream strategy? As compared to, is this the end of the world?
To provide some statistics about how markets have historically dealt with disease outbreaks:
What the above shows is that historically an outbreak of a virus has caused a market shock or correction however the returns following have typically been reasonably strong. Whilst I am the first to note that history is not a guide of the future and that every incident is different, particularly noting that we have a situation today where the borders are closed to China, it is an interesting study of history.
In addition, this correction is the 26th time the market has fallen by more than 5% since the GFC in 2009, that is over 2 times per year on average! And each time the market falls, the hype and fear of the next big crash comes out.
Therefore, how do I suggest you deal with the market volatility this time around?
Re-assess investment goals
As outlined above, now is a good time to re-asses what your investment goals are. Importantly, you should always consider whether your objectives can be and have been achieved historically with your current strategy. In addition, exploring whether any other alternative strategies are likely to allow you to achieve those objectives.
Develop a contingency plan
If you haven’t already done so, please develop a contingency plan. For example, planning for a market crash can reduce the chance of an unexpected outcome in the event of a market correction. In fact, I think one thing that is certain with in investing is a market crash, as such, planning for this is so critically important for your peace of mind.
Most people who spend any time in our office will appreciate the fact that we spend a lot of time and effort planning for and preparing for a market correction. This I feel is one, if not the most important, component of long-term investing.
Hold your nerve and don’t watch too much news!
Holding your nerve should be a little easier if you plan for volatility however naturally we all feel terrible when the market does correct, let’s face it, we wouldn’t be human if we didn’t. That said, it is rarely a good time to sell an asset when the market is correcting so holding your nerve and avoiding the hysteria definitely helps and gives you a greater chance of long-term investment success.
In conclusion, it is completely understandable to feel anxious and worried in times like now, in fact it is perfectly normal. That said, I would encourage you to remain vigilant and aware of the market movements and keep a close eye on your investment strategy. Importantly, if you can hold on and ride out the storm investors are typically rewarded for your doing so. Above all else, if you remain concerned please seek professional advice to try and help you make sensible financial decisions.