In recent weeks, the coronavirus has dominated global events. While your health, and that of your family, is likely to be your most important priority, you may have seen headlines concerning the recent volatility experienced by world financial markets.
While governments around the world take draconian steps to stem the spread of the virus, one of the most immediate consequences of the coronavirus outbreak has been the impact on pensions and investments.
Between 26th February and 25th March, the value of the FTSE 100 fell by around 19%.
Other markets around the world have also seen falls. While you may be concerned about the short-term volatility of the markets, it’s important to remain calm and focused on your goals. Here are three reasons to remain calm during periods of uncertainty.
1. You’re investing for the long term, and markets typically recover
Whenever you invest in equities, short-term volatility is something that you should expect and accept. Everything from economic data to a global pandemic can affect what happens to markets around the world, and so on any given day or week, prices will always fluctuate in the short term.
However, in the long term – and that’s what most of us are investing for – markets tend to offer positive returns.
Here’s the year-on-year performance of the FTSE 100 index between 2009 and 2018:
During this period, the compound return was 8.8% per annum. As a total return that was 121%.
In the longer term, IG report that the compound annual return of the FTSE 100 over the last 25 years was 6.4% with dividends reinvested. This would be a total return of 375%.
Here’s some longer-term data.
The chart below shows how £10,000 invested in 1990 has grown in the intervening 29 years. You’ll see that despite many volatile periods – the dot.com bubble, the global financial crisis etc. – £10,000 invested in UK equities was worth £102,992 on 31 December 2019, equivalent to an 8.08% annualised return.
Compare this to cash, where £10,000 invested in 1990 grew to £36,071 during the same period.
Note that past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Notes: Cash = ICE LIBOR – GBP 3 month; global equities = the MSCI World Index; US equities = S&P 500; UK equities = FTSE All-Share; inflation = Retail Price Index, (Jan 1987=100); global bonds = Bloomberg Barclays Global Aggregate; European equities = MSCI Europe; UK gilts = ICE BofA; UK gilt (local total return) emerging market equities = MSCI emerging markets; all shown gross of taxes and of fees and in GBP.
Source: Bloomberg and Factset and Bank of England, as at 31 December 2019
If your long-term goals haven’t changed, it’s unlikely that your plans should. Your goals are likely to be the same as they were a week or a month ago. Investment strategies are designed with the long term in mind, and this naturally considers periods of both positive and negative returns.
2. You’re likely to have a diversified portfolio
Most investors have a diversified portfolio. This means that rather than holding one single stock, or all your money being saved into equities, your portfolio is spread around a range of asset classes including shares, bonds and cash. You might also have investments in geographically diverse markets, such as the US or emerging nations.
What this means is that the headline fall in the value of the FTSE 100 that you see in the news is typically not the same as the fall in the value of your portfolio.
Diverse portfolios that include exposure to other asset classes are designed for precisely this type of situation.
3. Selling now turns a paper loss into an actual loss
Trying to time the market to buy at the bottom and sell at the top is all but impossible. Even experienced fund managers and experts can’t do it – at least not consistently. You may have heard the phrase “time in the market, not timing the market.”
Fidelity looked at how $10,000 would have grown had you invested it in the S&P 500 Index from January 1st 1980 to December 31st 2018. If you had left your money invested throughout that entire period, it would have been worth $659,591 on 31st December 2018.
If you had missed just the best five days in the market during that period, your total investment would be worth $427,041. You would have sacrificed $232,550 (more than £194,000) simply by being out of the market for five days.
If you had missed the best 30 days during the same period, your $10,000 investment on 1st January 1980 would be worth just $125,094 on 31st December 2018. You would have sacrificed $534,497 of gains by being out of the market for just 30 days.
What does this mean? Trying to time when you enter and leave the market could have a significant impact on your returns.
And, selling after a downturn turns a paper loss into an actual loss. Imagine the value of your home had fallen in the short term. You’d be unlikely to sell it immediately and realise a loss.
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Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.