While the circumstances created by the Covid-19 virus are truly concerning, as investors it is critical to avoid panic and short-term thinking. Many investment mistakes are made at extremes in the market as our emotions tend get the better of us. It’s our job to stay disciplined, lean on our investment process and assess the long-term impact of these events on your portfolio.
While our strategic framework isn’t a panacea for solving our own emotional biases, but it does provide a concrete structure for decision-making that investors can fall back on during times of market stress.
Most investors of course do not like sharp equity declines. But for those investors still accumulating assets, they actually represent important opportunities to invest in growth at a lower price. As a result, if managed properly, market downturns – though emotionally difficult – can increase long-term wealth.
Such declines in market values creates a buying opportunity for patient, longer-term investors. Indeed, we observe many of the world’s top private equity funds and endowments with long-term time horizons working hard to purchase securities at significantly better prices than a month ago.
It’s important to view performance through the lens of your financial objectives in the long-term, rather than day to day headlines. While there is a lot of uncertainty, our key message for clients:
Don’t panic – Stay Invested
• Stick to your plan
• Don’t make temporary losses permanent
• A liquidity strategy that can help you “keep the lights on” without having to sell at “low prices” in the meantime is key.
• For example, with the equity bull market aging, now is a good time to ensure that there is sufficient liquidity in the portfolio to avoid being forced to sell assets at depressed levels.
• The stock market’s best and worst days are clumped together. You can’t miss one without the other and that has a damaging effect over time. Consequently, don’t liquidate portfolios.
Play for time
• Reduce spending and/or increase saving
• Receive income from dividends and fixed income.
• Bear markets are typically over quickly, with equity markets making new all-time highs about three years after the previous peak, on average.
• Rebalance back to your target allocation through dollar cost averaging given the high levels uncertainty. While we will never time the market bottom clients need to return to strategic targets in order to achieve goals.
• Start nibbling into risk assets such as select equities that we believe will be around in the next two years.
Challenging markets such as these are difficult to navigate, so stick to your plan, make sure you have adequate sources of cash to meet your obligations, and rebalance. Opportunities are beginning to unfold, and we will continue to share our views on what we regard as attractive over the course of this historic market decline.