It's been a couple of weeks since my last post, partly because there simply aren't enough hours in the day to do everything I need to do right now and partly because the extreme volatility of February and March has been replaced by slightly more circumspect trading.
Often referred to as the ‘fear index’, the Chicago Board Options Exchange sponsored VIX, or volatility index measures implied volatility one month hence. It provides a useful insight into the level of perceived market risk and investor sentiment. To give you some context for how seismic the conditions we have been living through lately have been, the normal range for the VIX is 10-20, with occasional spikes into the 20-30 range.
On 16th March 2020, VIX broke 80, a level not seen since the height of the global financial crisis in 2008. Things have settled down somewhat since, with the index currently trading at below 40. However, this is still more than double the long-term norm and suggests that sentiment is still fragile.
What does this mean for you? Well, one thing is for sure, you don't want to be out of the market with this level of volatility. Being caught on the wrong side of daily movements of up to 5% can be very damaging. For this reason, we are avoiding all trades that involve time out of the market until such time that VIX returns to more normal levels.
The good news is that increased levels of ‘fear’ mean that there are opportunities for long-term investors with cash, earning close to zero, to convert into investments at much cheaper prices. Being brave when others are fearful is one of the secrets of investment success.
During this time of self-isolation and home working, Barry O'Neill takes time to answer some of the questions we've been asked about investment planning during the coronavirus outbreak. This latest update aims to bring some answers and considerations during the uncertainty of movements in financial markets.
The news flow has been so bad recently that stock market movements over the past few weeks have echoed the lyrics from a Status Quo song, 'Down, down, deeper and down'. So when the numbers impacted by COVID-19 continue to rise exponentially, how is it possible that the UK stock market has just recorded its record one-day points increase? Yes, that's right, the index of the UK's largest 100 companies rose by 452 points, or just over 9% on Tuesday just as the country entered a 'lockdown' phase designed to suppress the spread of the disease.
Now, I'm not for a minute calling the end of the market woes, but it is further evidence of the case I made in my previous post about the biggest market rises often coming in times of extreme market stress. Tuesday's massive rise narrowly pipped the previous high, recorded at the height of the global financial crisis in November 2008. Remember, market inflexion points generally happen not when the bad news stops, but when the news stops getting worse. Although the UK and many countries across Europe are suffering spiralling numbers of new cases and ultimately, deaths, there is some sign of the numbers no longer getting bigger in Italy.
The other factor influencing markets is the huge stimulus package being proposed in the US. As I said earlier, individuals, companies, governments and central banks around the world are doing everything they can to conquer this truly dreadful disease and its impact on every aspect of all our lives. It's a question of when, not if, this concerted effort will triumph.
So what action should you take now? For anyone already invested, hold your nerve. Trying to time markets in times of normal volatility is virtually impossible, but right now, I'd put it in the truly impossible category. If you saw Monday's near 4% fall to below 5,000 and threw the towel in and sold up, you've just missed a 9% return. If you've got cash that you plan to deploy into investment markets but you are waiting for the best day, you will never be able to pick it in advance. As Tuesday has proved once again, the best days come when it is least expected. The best time to invest is when you have spare money to invest. You won't pick the bottom of the market, but right now you will be buying in at historically cheap levels, so your downside protection is far greater than it was a month ago. The past performance warnings say investments can go down as well as up for a reason. To help you get the Status Quo song out of your head, why don't you start singing Jackie Wilson's Higher and Higher?
In such a rapidly evolving world, it’s completely understandable if your emotions are starting to get the better of you. This might mean that you’ve considered, even fleetingly, abandoning your investment strategy. This is not unreasonable. We are emotional beings after all. History proves that this is when investors who work with an adviser do better than DIY investors because they stay the course and maintain their discipline.
At close of business on the London Stock Market on Tuesday 17th March, St Patrick’s Day found investors in a slightly more optimistic mood. The index of the largest companies on the main UK market was up by almost 2.6% for the day.
Although this upwards movement is modest compared to the scale of the recent dramatic falls, it serves as a good reminder that some of the largest one day rises take place in the midst of a crisis. If we look at the largest stock market, the USA, five of the ten biggest daily increases in the S&P500 index took place in the middle of the global financial crisis in 2008. The others were immediately following ‘Black Monday’ in 1987, during the ‘dot.com’ crisis in 2002 and would you believe, 13th March 2020, yes that’s last week!
Now, I’m not for a moment suggesting that market participants have already started looking at the future with optimism, far from it. Merely that if you are tempted to try and ‘time’ markets by selling shares and retreating to the perceived safety of cash, that timing is fraught with danger. There is inevitably a delay between thinking about getting out, and actually being out. This could mean you don’t get the price that you thought you were going to get. It means that you would definitely convert the recent ‘paper losses’ into real losses and miss those ‘good days’ when they come along (and they will). Research shows that missing just the 10 best days a year drastically reduces your longer-term investment returns, making market-timing nigh impossible.
Any shares you hold are likely to be worth 20-30% less than they were at the start of the year, but these falls are also on the back of very strong gains in recent years, so context is important. Very few of us should have more than two-thirds of our money invested in shares. It’s simply not necessary for most people. Your downside protection comes from the low-risk assets in your portfolio, not from trying to time the market.
I likened this today to having some foreign currency left over from a previous holiday. If the exchange rate is poor and you don’t need the money to live on, you’ll probably hang on to it until the rate is more favourable before you do anything. The exchange rate between invested assets and cash is clearly not great right now, so this would be an unfortunate time to convert in that direction if you don’t have to. This of course means that the flip is also true. If you are looking to convert cash into invested assets, rates are much better than they were a few weeks ago.
As ever, if you need to talk through your own situation, please don’t hesitate to get in touch.
Since I wrote this article, COVID-19 continues to dominate the news and is uppermost in the minds of investment market participants. Risk is being re-priced minute by minute and the consensus is that the outlook in the immediate future is more bleak than it was on Monday. Governments around the world are taking varying steps to contain or delay the virus and all businesses have had to put in place contingency plans so they can continue to operate no matter how severe this becomes.
On the back of the 4th largest one day fall in the UK market, we’ve now had the largest fall for 30 years. If you are feeling scared right now, it is a perfectly understandable emotion in the circumstances. However, despite all the headlines about the state of the UK stock market, please remember that this is only a part of a globally diversified portfolio and the other asset classes that we include specifically to dampen the volatility of your portfolio in such circumstances are doing a really effective job of protecting your capital. If you were invested with us since the start of 2019, your portfolio should be worth broadly the same as it was at the start of that period.
If you don’t need to access a large portion of your invested capital in the short-term, you should concentrate solely on your health and wellbeing and going about your life taking sensible precautions to avoid the virus. If you do need access to capital soon, instead of withdrawing from your invested portfolio when prices are depressed, consider using some of that ‘emergency fund’ that we’ve always told you to keep for a rainy day. In metaphorical terms at least, we’re in a monsoon, so it’s ok to use some of it. When this passes and markets recover, your emergency fund can always be topped up again from your portfolio.
If you’re so worried you cannot function properly and need some reassurance that your finances can survive this, please let us know and we will be happy to assess your situation.
In a year that many thought would be dominated by the aftermath of the UK leaving the EU on 31st January, a much more serious issue has emerged to dominate every news bulletin and newspaper article.
The Coronavirus is impacting virtually every aspect of our lives. Investment markets are not immune to this phenomenon because ‘markets’ are simply groups of people, buyers and sellers, who come together to collectively share knowledge, set prices and trade securities. This process happens every minute of every day that markets are open. Prices change when new information becomes available. That information normally applies to one single company, sector or country but on Monday, the Saudi Arabian/Russian oil feud weighed heavily on top of existing worries about Coronavirus to drive all stock markets sharply down. Market participants were struggling to understand exactly how this news would impact the securities that make up each market and priced-in that uncertainty by marking prices much lower.
In the simplest terms, a stock market is a vast asset pricing machine that considers all the available information and how that might impact the return expectations of the constituent securities to determine what a fair price at any point on any given day. The more perceived risk there is, the more markets will compensate by lowering prices so that buyers are still prepared to buy. All the available information about the impact of coronavirus and the Saudi/Russia oil feud is already priced-in, so unless you think you know something that the rest of the market doesn’t, you cannot hope to seek an advantage by trading.
The human cost of the coronavirus has already been significant and experts believe that worse is to come. It is little wonder therefore that investors are pricing in levels of risk not seen since the global financial crisis in 2007/08. Monday saw the 4th largest single-day fall on the UK stock market, with most other developed markets following suit and closing down by 7-8%. Daily movements of this magnitude are rare. The long-run average annual return from shares around the world is 8-10%, so with this level of price movement in a single day, it is entirely understandable if you are feeling nervous, frightened or just unsure what to do.
It is worth remembering that average returns are just that, the average. Your actual return from stock markets in any given year is much more random. The 2019 calendar year returns from developed world shares were more than double and almost treble in some cases compared to the long-term norm. For every above average year, there needs to be a below average one to restore the normal order.
Monday’s falls in stock market prices were dramatic but returns since the start of the year are still within a ‘normal’ or expected distribution of returns. For that reason, we are allowed to be disappointed or worried but we should not be surprised. This is what stock markets do from time to time.
In terms of what if anything you should do, it is too simplistic to say just sit on your hands and do nothing. However, whether or not you need to take action should not be dictated by the general level of panic, but on a measured analysis of whether what is happening in investment markets today, tomorrow or next week will directly impact your ability to live the life you want to lead.
Your gut reaction may be to think about selling your shares and retreat to the safety of cash. As cash is not a long-term store of value because interest rates lag the rate of inflation, you would also need to be able to answer another question, when should I get back in to markets?
A plethora of academic evidence shows that trying to second-guess the market by timing your entry/exit point is fraught with danger. If you don’t need access to capital now, there is no need to sell. Markets do go down in value from time to time. It’s part of the investment journey. If you sold every time markets fell, the cumulative impact of crystallising those falls would destroy your investment returns. Being out of the market even for very short periods of time can mean you receive a fraction of the returns you are owed as an equity investor.
At this early stage of the year, no-one knows what 2020 will ultimately deliver in terms of investment returns. What we can be certain about is that long-term, patient investors win the day and get the returns they are owed for the level of risk they have chosen to take. Short-term speculators can and regularly do lose their shirts.
At Carbon, our investment philosophy is the thing that guides our strategy for our clients. The first of our seven principles is that you should take the minimum risk required to achieve your objectives. This means that the vast majority of our clients have an appropriate portion of their capital invested in low-risk assets designed to protect capital when shares fall sharply. Some question why we include these low-risk assets as returns can be modest when shares are flying high. The reason should be absolutely apparent right now as the low-risk assets are doing an excellent job of compensating for the falls in shares.
We continue to review our strategies in light of the current market conditions and you can be assured that we will take any appropriate steps to ensure your investment portfolios are still on track to deliver the long-term returns you require.
We remain as ever, ready to talk to you, to reassure you, to reappraise your personal plans, and ultimately to help you make good decisions. Together we will get through this.
We have offices in Edinburgh, Glasgow, Aberdeen, Perth and London. You can contact us at any of our offices, or by email.
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