How to stop the Corona virus destroying your investments
Last week, we all became poorer as stock markets in South Africa and rest of the world declined by around 25%.
What do we need to do?
I have been talking to a number of economic and investment specialists to help me understand what is going on so that I can give my clients decent advice.
Background
People started becoming ill from the corona virus (COVID-19)at the end of last year. The number of infections increased exponentially and in late January 2020, the Chinese government took firm action which included the locking down of the city of Wuhan.
By way of perspective, the population of Wuhan is 11 million which is bigger than London (9m) and New York (8.5m). This is not some remote Chinese village.
The actions of the Chinese government resulted in new infections dropping off dramatically – so much so that the purpose built hospitals for Corona patients have now been closed. Many factories are starting to operate again.
A similar pattern was seen in South Korea where state interventions resulted in new infections dropping from over 900 a day to under 80.
Action in Italy was not as decisive. It is reported that after the government announced its intention to isolate the hotspots in the north of the country 25 000 people left Milan. Instead of isolating the disease to a particular area, it spread throughout the country. The whole of Italy was placed under lock down last week.
This is big. Italy has the third biggest economy on Europe.
We have seen that if firm action is taken and properly policed, the virus can be contained and the economic activities can resume.
The concern was that there was no decisive leadership being shown on this front in the USA or South Africa. Donald Trump initially pooh-poohed the danger that Corona held for the USA. This made investors uneasy.
When USA sneezes we all catch a cold
We do not appreciate how big the USA economy is. They have had 10 years of excellent growth. Unemployment is low and consumer spending is high. In fact, consumer spending accounts for more than 70% of the US economy – this is bigger than the GDP of China!
If the Corona virus takes off in the US and we end up with empty shopping malls for an extended period, we can find ourselves in a worldwide recession.
It was against this backdrop that the share prices started falling last week.
Response
Both South Africa and the USA have taken decisive action.
Large events have been cancelled, travel restrictions have been imposed and sporting competitions placed on hold.
This should impact on the way in which the disease takes hold in the two countries. Whether it is sufficient remains to be seen but we must applaud the political willingness to take action.
So what do I need to do about my investments?
Last week we had two days when the stock market fell badly. We were shocked by the extent of the fall.
There are, however, also days when the market goes up significantly. The challenge is that as investors, we do not know when these days are.
Last Friday I was at a talk given by the economist, Kevin Lings where he spoke about the impact of missing those days when the market went up massively.
He gave an example of investing R100 000 in the JSE All Share from 28/2/1997 to 31/12/2019. The tale below shows how missing key growth days impacted on the outcome:
| Value of investment | Amount lost by being out of the market | % lost due to being out of the market | |
|---|---|---|---|
| Invested for full period | R1,731,551 | ||
| Out of the market for the best 5 days | R1,241,002 | R490,549 | 28% |
| Out of the market for the best 10 days | R949,504 | R782,047 | 45% |
| Out of the market for the best 30 days | R382,490 | R1,349,061 | 78% |
Rule 1: Don’t try to time the market
Time in the market is much better than timing the market when you are looking at a long term investment.
You do not know when those big days will be and you can see the importance of being invested when they do come.
When markets fall dramatically there is often a correction upwards soon afterwards if the fall was not fully justified.
Rule 2: Time in the market removes volatility
Share prices move up and down and as we saw last week, this can be quite dramatic. This up and down movement is called volatility.
Your investment horizon determines the amount of volatility risk you should be exposed to. I like to classify investment horizons as follows:
- Short term – less than 2 years
- Medium term – 2 to 8 years
- Long term – more than 8 years
While share prices move up and down, over the years the general trend is upwards. If you have a long investment horizon, you can handle a much more volatile investment than if you had a short term one.
If you have a medium or long term investment horizon, you can relax. Market movements are a part of life and will be smoothed out over time.
Rule 3: Have a plan
This is the most important rule of all. Too few people have an overall financial plan.
What often happens is that people have a series of separate investments without an overall strategy. The danger is that they do not appreciate the time frames of these investments and panic when the market drops. They sell at the wrong time and end up leaving massive amounts of money on the table through poor choices and opportunity costs.
A proper financial planner will sit down with you, discuss what you want to do with your life over the short, medium and long terms and put financial plans in place to achieve that.
If you have a plan and the investment makes sense, then you should act on it and not try to time the market. Similarly, if you have a plan, don’t exit an investment if there is a downturn.
Take a Lesson from Warren Buffett. He recently increased his holdings in Delta Airlines, despite the fall off in value due to the Corona Virus. He has a plan and a view on the market. He sees value in owning shares in an airline and the current market conditions allow him to buy these shares cheaply. He is not deterred by impact that the current travel restrictions will have on short term earnings.
In conclusion
If you don’t have a plan, you can end up making short term decisions that have a long term impact.
Use these challenging times to take stock of your situation, speak to a certified planner and get a plan in place.
If you need one, call me. I don’t charge for the first consultation and there is no obligation to make any further use of my services afterwards.
In these times of isolation, I am equipped to run these consultations remotely via Skype, Zoom and Google Hangout. In fact I did my first Corona related virtual consultation last week.
Kenny Meiring MBA CFP ®
082 856 0348
Kenny@financialwellnesscoach.co.za
Disclaimer The above does not constitute financial advice. It is offered as a perspective to help you make sense of these important developments. Each person’s situation is unique and a proper analysis is needed before advice may be given