In our regular column, Money Matters, SIMON PARFITT of Pyrmont Wealth Management answers your questions on finance. Here, he looks at some of the ramifications of the global pandemic and the question on everyone’s mind – will there be a coronavirus recession?
Probably, but don’t panic! The coronavirus has triggered an economic decline around the world, reminding us that, of course, markets don’t just go up forever. While there have been signs of some stock market recovery, we may not be out of the woods yet, and nobody knows with certainty what the broader economic recovery will look like or when it will be. But this is okay. A looming recession can be distressing for all of us, but this should not induce fear. It is purely a sign that the economy is functioning as expected. Recessions have happened before, and they will happen again.
The good news is that we can prepare for these volatile situations by understanding our sometimes irrational human behaviours during crises, and instead turning to evidence-based, long-term investing principles for guidance. Here are the most important things to be mindful of.
This situation has brought with it a double dose of fear. The virus that has the potential to cause us bodily harm and the economic shutdowns could cause us financial loss. You can’t control the global economic recovery. However, your reaction to the financial markets with your own investments is entirely in your control. It’s no fun seeing your portfolio drop in value. But you must also remember that you never actually make a loss until you sell out of the market.
The Inevitable Advance
There are no accurate methods for predicting when the recovery will be; all we know is that it will happen. History has taught us that, by taking on the risk of volatility in short term market downturns, you’ll be rewarded with positive expected returns in the future – 73 percent of the time, stock markets have shown to be positive two years after a downturn. Yes, the headlines are scary, but they’re designed only to sell news, not care for our personal financial situation.
Sometimes, situations like this present opportunities. For example, as prices drop, you may have an opportunity to “rebalance” your portfolio. This means you might be able to “sell one thing and buy another” as a way to get your portfolio back to a desired mix that is most appropriate for your objectives.
For regular investors, if your strategy remains unchanged, you will be rewarded later by continuing to purchase assets at lower prices. You can buy more units for the same amount of money. When the markets inevitably rebound, you will benefit more compared to if you had sold in and out of the market.
Here to help
If you’re struggling with recent events, or feel affected by the news and predictions, the best response is to acknowledge your emotions and seek help if you need to. If you can manage your behaviours around short-term market events, you have a much better chance of reaping the potential benefits of longterm investing. If you have any questions about your specific situation, contact us.
Ask Pyrmont about life-centred financial planning. Simon is regulated by both the HK Confederation of Insurance Brokers (011833) and the Securities and Futures Commission (BGY807).
This article first appeared in the June 2020 issue of Expat Living magazine. Subscribe now so you never miss an issue.