As I write, we have been subjected to weeks of living under what many jovially call ‘house arrest’. The pandemic has affected most, if not all, communities to varying degrees. In some countries, governments are slowly relaxing restrictions intended to stop the spread of the virus. But the uncertainty remains. How long before people can return to work? How many will have jobs to go to? How many businesses will survive? How long will the economy take to recover? When will confidence return for people to travel and fly again? Will demand recover to pre-pandemic levels? However, the probability is that equities will outperform bonds and cash in the coming decade.
Markets and investors crave certainty, but in an age when technology allows us to communicate halfway across the globe from our living room, the answers to these questions remain elusive. In this atmosphere of heightened uncertainty, it is easy to become a victim of fear and feel forced to make sweeping investment decisions: selling risk assets and in preference for cash, for example, or selling bonds in favour of cash. Given that our robust, well-thought-out investment strategies are faced with so much uncertainty, this is not the time to be making big decisions in regard to our investment portfolios. Cash gives us optionality but we cannot know enough about the future to time the market, and if trying to do so, we will likely miss the rebound as assets reprice again - which they will, as light follows day. Bull markets beget bear markets that beget bull markets.
Focusing on what we can control, and not on what we cannot, will help us avoid making behavioural errors which we may regret at some time in the future. We know that the current economic slowdown was not caused by structural issues, but equally we do not know for how long this slowdown will last. It is not easy to trust our analysis and keep calm when assailed hourly by the talking heads of ‘investment entertainment’. By ignoring the noise and remaining rational, we will put the odds to achieve our desired investment outcome firmly on our side. This is the time to stay the course.
Markets are forward-looking and may have priced in much of the news. Health and economic figures could get worse, but this does not mean that our investment strategy is flawed and needs wholesale change. If you have a long-time preference and the stomach to cope with price volatility, using index funds as the basis for your investment strategy, then rebalancing market risk in your strategy will help you to stay the course. If your strategy employs stock selection, you may wish to analyse balance sheets of companies with a large exposure of debt relative to equity, which will make them increasingly vulnerable, the longer the economic shutdown lasts.
Either way, to avoid making behavioural errors you would be well advised to tune out the noise and resist looking at your valuations every time there is a drop in market prices. Please feel free to write to me if you would like a complimentary assessment of your investment strategy and investment mandate.
The author is a member of the Society of Trustees and Estate Practitioners and an investment counsellor. The comments and observations by the author are a reflection of his opinion and do not constitute an offer to buy and hold securities, nor does he receive any remuneration of any kind from names referred to.