Coronavirus – and the markets’ volatility

With billions being wiped off the stock market due to the coronavirus outbreak, it’s hard for investors not to panic. Markets are extremely volatile, despite measures taken by central banks around the world, including the Bank of England, to try and reduce the impact of the pandemic.   

There are, however, a few key principles to bear in mind regarding your finances:

Stay invested

The main advice is to hold your nerve. Don’t get distracted by all the ‘noise’ of the markets lurching up and down. If, for example, you see the market jump up 600 points, only to witness it lose 1400 points and then rise another 800 points in the course of a week or even a day, you know emotion has taken over from all rational thought. In such circumstances, it’s better to wait until things calm down, no matter how long that may be.      

It would be impossible to predict the bottom of the curve so it’s better to keep your funds invested. Otherwise, by taking your money out, you could risk being out of the market on the very days it recovers and does well.  

Think long term

The coronavirus situation is without doubt unprecedented, fast moving and deeply concerning. Yet although we might not have gone through anything like it in our lifetime, the stock market has experienced crises before and recovered. Just think of both World Wars, the Gulf War, oil shortages, the 2008 financial crisis and recession. So while in the short term your investments are likely to be affected, anyone investing in the stock market knows they should be thinking about a five to ten year period. Coronavirus will continue to unsettle the markets but volatility will always be a part of investing.   

Diversification

Almost 70 years ago, in 1952, the Nobel laureate Harry Markowitz described diversification as ‘the only free lunch’ for investors. The idea was that, without market foresight, the optimal portfolio was one that blended many uncorrelated assets. Their different risk and reward profiles should, in theory, smooth the investor’s overall performance.

Such intuition lies at the heart of the Entire FS investment philosophy and model portfolios, in both the risk-rated portfolio construction and the equity index approach which attempts to own entire markets.  Our platform-based portfolios are highly diversified, with over 10,000 equity holdings through our fund managers Vanguard and Dimensional.

Don’t check obsessively   

The best advice at times like these is not to sit there checking your investments on your phone, tablet or desktop all the time. Switch off your notifications as it will only make you anxious and could tempt you into making a knee-jerk reaction.  

There’s a lot to be said for the sentiment expressed in Kipling’s poem, “ If you can keep your head when all about you…” particularly when markets are plummeting.

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