There is an old saying in financial markets: “The market stops panicking when the government starts to panic”.
There is no question that the market is in panic mode. There is also no question that – facing criticism around their response to the pandemic – the Government is showing signs of panic.
But at this stage – the panic doesn’t seem to be subsiding on either side.
A global pandemic, coupled with an oil price collapse, has launched us squarely into a crash unlike any we’ve seen before. It has created global market volatility – mainly because it’s unclear what the length and depth of this current downturn will be, what the ultimate impact on the world economy will look like, and whether the impact is going to be temporary or long-lived.
Here’s what we know
- Markets are discounting while at the same time trying to figure out what’s going on (which is impossible at this stage)
- The financial system isn’t broken (as it was in 2008)
- That when the tide goes out on this crash, those sectors of the financial markets that were “swimming naked” will be exposed.
It is predictable
Studies of market crashes over the last 150 years reveal that, on average, it takes eight months to recover to the original high point. Other statistics reveal:
- 50% of downturns recover within two months
- 80% of downturns recover within one year
- The longest recovery period was four years
There’s speculation that the economy and markets could suffer further blows over the next three-six months. There’s even stronger speculation that the economy will come back and markets will recover in the future.
And further to that, it’s likely that in three to five years’ time this will be an event that many will credit as the creation of a great opportunity to get access to good quality companies and businesses at compelling multiples.
These are times when Warren Buffet’s theory to buy when others are fearful seems most relevant – but, more importantly, what is required is a disciplined approach to investing.
Now is not the time to be reactive
With global equity markets currently recording negative 30%, your asset allocation is likely in need of review and potentially needs to be rebalanced back to your original risk profile. For example, if your long-term asset allocation strategy is to hold 50% in equities, there’s likelihood you are now only holding 35% equities in your investment portfolio.
Rebalancing now will reduce your risk of being underweight when the market recovers.
If you have adopted a conservative approach with asset allocations in recent times, you may have a cash allocation that can now be deployed into undervalued asset classes. Cash does not just protect you from the drawdowns but also allows you to take advantage of opportunities when they arise.
However, far from suggesting that investors focus on buying at discounted rates, market sentiment at this point is that a prudent and considered approach is the wisest move.
Adopting a measured approach, keeping a close watch on financial markets in the short term, and monitoring market signals such as inflation and unemployment will best equip you to detect where there could be risk or indicators of recession.
Market trends consistently demonstrate long-term asset allocations will produce 80% of your total returns over the long term – so in times of volatility, it’s wise to actively stick to your established investment strategy.
And in times of uncertainty, it’s important to be focused on the long-term.
Need some help or got questions? Contact your local Bentleys advisor now.
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.