The cost of being too cautious:
Succeeding in investment markets amidst the Coronavirus
by Henry van Deventer, Chief Specialists – Advice Model Design
As the Coronavirus (COVID-19) has taken centre stage across the world in recent weeks, we’ve seen a great deal of uncertainty and some adverse reactions in investment markets worldwide. This is not surprising. Whenever people are faced with fear and uncertainty, it’s very tempting to fall victim to our ’fight or flight’ response. Doing so when it comes to our investment portfolios could be disastrous.
Stay focused
So what should investors do in our current environment fuelled by COVID-19? At times like these it becomes more important than ever to stay focused.
The purpose of an investment portfolio is to get the growth we need to allow us to achieve our goals over time. With this in mind, the most important question to ask, when uncertainty strikes, is how whatever’s happening in the short-term will affect our ability to achieve our goals in the longer- term. It’s important to remember that emotions often drive markets in the short-term , but in the long-term share markets are driven mostly by earnings. If an event won’t have a drastic impact on most companies’ ability to increase their earnings over time, it likely does not merit getting out of the share market in the short-term.
Don’t cash in your losses
There’s an old saying in investment markets: It’s not timing the market, but time in the market that matters. When uncertainty strikes, it’s valuable to remember the most basic principle of investment: Getting an investment return means buying when prices are low and selling when prices are high. When markets drop due to a short-term scare, prices have already fallen. Cashing in at this point will only guarantee a loss. It’s unpredictable when markets will recover following a crisis — when and by how much. Investors that sell when prices are low have a very good chance of losing out when panic subsides and prices bounce back. The effects of this can be disastrous over time. Investors that fall victim to this don’t just make a loss based on this single decision. They also lose out on all of the future growth that this loss would have earned.
Let the investment managers work
The most popular market-based investments in South Africa invest in a variety of asset classes like shares, property, bonds and the money market. In uncertain markets, investment managers actively look to limit the risk in these portfolios by moving money between shares and other asset classes as needed and to capture returns that recovering markets may offer. By taking our money out of these portfolios prematurely, investors are not able to benefit from this.
Learn from the best
The greatest risk in uncertain markets is making decisions that will keep us from achieving our financial goals over time.
In times like these, it’s usually best to stick to our guns and remember the words of the most successful investor in the world today:
“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
Warren Buffett
