On the Money

Covid-19 impact on financial markets

Barry Kerr

Reporter:

Barry Kerr

Email:

barry@wealthwise.ie

Covid-19 impact on financial markets

The temptation to 'DO SOMETHING' is very strong and doing nothing is often the hardest thing to do

We are living through some truly extraordinary times.
The Covid-19 virus Pandemic is unprecedented and has caused huge disruption not only to our daily lives and also to financial markets around the world. It’s perfectly natural that many people are feeling anxious about the effects on themselves, their families & their finances.
So far this month we have seen falls of 30%-35% in many global Indices and have had the worst days on markets since 1987. Uncertainty is the one thing that financial markets hate and Covid-19 brings uncertainty in abundance.
Over the past two weeks we’ve received numerous calls from clients which can generally be broken into two categories (1) If I’m already invested in Markets, what should I be doing? Or (2) Is this a good time to Invest in markets?
The first thing to say is that if you’re invested in Markets it's perfectly normal to be worried right now. For most people, their main exposure to financial markets is via their pension fund, a Pension fund is most certainly a “long term” Investment and now is the time to remember that. Try not to let this short term volatility impact your long term plan.
There’s a huge challenge in managing our emotions and staying strong. It’s at times like this that we need to focus on the long term and the reasons why we are invested.
“People feel the pain of losses more than they enjoy the pleasure of gains”. The most obvious response to feeling scared is a need to ‘DO SOMETHING’. That’s an evolutionary survival technique, and very difficult to avoid. Doing something makes us feel in control and while it offers short term respite, it rarely (especially as an investor) leads to long term benefit.
One of the most important things is that you don't overreact by moving your Investments to cash when their value is down, That's the worst thing that people can do. Remember a Loss on paper only becomes a “real loss” when you crystalize it. 
The temptation to 'DO SOMETHING' is very strong and doing nothing is often the hardest thing to do. If we learned anything from the 2008-09 Financial Crisis it’s that the Market will always bounce back eventually, so the key message is to remain Invested. One significant difference between today and 2008 is that this is a Health Crisis while 2008 was a financial crisis, therefore the recovery is likely to be much quicker once the Health Issues are addressed.
There are also very many people who see this market volatility as an investment opportunity and wonder if now is a good time to Invest. Market volatility often means lower prices.
It's a funny thing that in the stock market people actually seem to want more of something when the price goes up, and they want less of something when the price goes down. Obviously this is the opposite of how we should think about it.
The biggest problem is that timing the market is notoriously difficult. Investors often wait on the side-line looking for the perfect time to Invest and as a result often miss much of the best returns.
Over the past 20 years in US Markets six of the 10 best days, the ones you really don’t want to miss, fell within two weeks of the 10 worst days, many Investors who had fled to safety missed out on these returns.
Buying at the absolute low and selling at the peak is nearly impossible in practice. There are a few different strategies Investors can adopt to try and smooth out the impact of this Uncertainty. One is called Euro cost averaging, Quite simply, Euro cost Averaging is a strategy which involves contributing regularly into a particular investment at regular intervals over a period of time. This period could be several months or years.
This strategy can sometimes help reduce risk during periods of market volatility. It is the process of buying, regardless of the share price. More shares are purchased when prices are low, and fewer shares are purchased when prices are high.
The cost per share over time eventually averages out. This reduces the risk of investing a large amount in a single investment at the wrong time. By buying a fixed euro amount on a regular basis, your focus is on accumulating assets on a regular basis, instead of trying to time the market.
This strategy allows you to take a lot of emotion and fear out of investing because where the market goes in the short-term is far less important to you, as long as you stick to a regular investment plan.
If a recession hits the economy and your investment falls in value, you’d just end up buying more shares at a lower price. One example of this in practice is the “AutoInvest” feature offered by Zurich Life. Many investors will be unsure of the best time to get back into markets in the coming months, Autoinvest is simply a phased investment strategy, where you drip feed your funds into the market over a period of time. Your money will be fully invested in a low risk cash fund* at the start date. Then, over a period of six or twelve months, your money is automatically drip-fed from the low risk fund into your higher risk fund choice until it is fully invested.
All staff in Wealthwise Financial planning will remain working throughout this crisis, if you have any questions or concerns about any aspect of your Finances please feel free to contact us on 071 9650699 or info@wealthwise.ie