The effects of the coronavirus pandemic on society look set to be severe, with the disruption to our daily lives only put into humbling perspective by its threat to life. Its effect on market sentiment has been severe, with the gloomy mood of investors reflected in tumbling share prices.
Market shocks like this force us to see the risk inherent in investing in shares, which can be easily forgotten when stockmarkets are calm or booming.
Investor ‘self-isolation’ could be costly
The principle of self-isolation to reduce the risk of becoming infected or passing the virus on is of course a sensible one. Tempting as it might be to try and insulate ourselves from the effects of coronavirus on markets, cashing out when the chips are down might be by far the riskier option.
There are good reasons not to sell up in a panic, when we see the value of our shares has fallen. The first is the real risk of permanent loss.
By selling investments when markets are down, you might not only be crystallising a loss but also fail to participate in any recovery in share prices. If you then chose to reinvest at a later date, you’d end up with fewer shares than you had before, leaving you worse off.
Of course, we cannot truly tell how destabilising the coronavirus pandemic will be for the global economy and the fortunes of companies, but it has already wiped trillions of dollars off the value of stockmarkets. Its short-term effect on investor sentiment has been clear, but will its lasting effect on our way of life be so great?
There is no simple answer to this, but unless you are of the view that share prices will not recover for years, it does not necessarily follow that you should walk away from investing.
Is this a buying opportunity?
The old adage goes that “you should buy when others are selling”. This may be quite a sweeping statement – there are obviously some companies whose future may be cut short by the pandemic’s impact – but the principle is valid.
If you are investing for your future with a long-term outlook, this should be reflected in your investment decisions. With share prices having fallen so much from their recent peaks, there is a case for buying at depressed valuations, if you are minded to put your money at risk.
We shouldn’t rely on how markets have performed in the past to forecast how they will behave in the future. One certainty, however, is that market fluctuations can create long-term opportunities for patient investors who can afford to ignore the short-term ups and downs that accompany periods of particular uncertainty.
What should you do?
Probably the worst thing to do at a time like this is panic – either by panic-selling or panic-buying, for that matter – for investments, as with anything else.
While it may be uncomfortable at times, sticking to your long-term financial plan would normally leave you better off in the long-run than switching tack. Remember, unless you plan on permanently abandoning the stockmarket, you will at some point be buying back in, quite probably at a higher price. The moment when you feel comfortable enough to do so is unlikely to be when share prices have fallen further, but rather when they have recovered.
The recent bout of volatility is a reminder too that diversifying your investments across different types of asset can help insulate your portfolio. Mainstream government bonds like those issued by the UK and US governments, for instance, have performed relatively well in the first months of 2020.
As ever, M&G’s fund managers remain resolutely focused on their longer-term objectives. By ignoring the market noise and focusing on the fundamentals, they look to actively manage risks and capitalise on the opportunities thrown up in choppy markets like we are seeing.
Please bear in mind that M&G is unable to give financial advice. The views expressed here should not be taken as a recommendation, advice or forecast.
The value of any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.