Potential Covid-19 market meltdown

03 March 2020

2 minute read

How to deal with a potential Covid-19 induced market meltdown: the lessons from parenthood.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • We are often drawn into reacting to a negative event emotionally, without a well-reasoned rationale
  • The fear of markets falling can actually be more threatening to your returns than the market itself
  • Our best advice remains to keep calm and take a step back before making any investment decision

Coronavirus and its effects are undoubtedly a global concern now; financial markets certainly appear to be reacting to the news. As we write equity markets globally have been selling off this week and many investors have been moving to safer assets such as US bonds. Although the Chinese attempts at containment seem to have stifled its spread, outbreaks in other countries closer to home naturally gives us cause for concern. It is easy to see how this concern could tip into panic.

There is a very human side to this outbreak. We don’t dismiss this. However, as investment professionals we must remain dispassionate when staring into the mists of the economic crystal ball. This doesn’t mean we ignore our species emotional nature, far from it. It’s our insights of the mechanics that drives our behaviour which allow us to help clients achieve their investment goals.

So, what do we do as investors faced by the constant news cycle updating us of every new case, and possibly inducing fear of a financial meltdown?

Any parent will attest, perhaps in hindsight, that a strategy of responding to the onset of a toddler tantrum with a visceral emotional reaction isn’t always a successful one. As with investment markets we don’t always understand what the underlying causes of the behaviour are but it’s very easy to get carried away and lose sight of what we are trying to achieve. The advice for parents happily doled out by smug blog posts are obvious when presented in the lull before the storm. Keep calm, exercise patience, try and understand what’s really driving the behaviour and discern. Is it a genuine concern or not. These are also wise words for any investor.

Sadly, we know too well that this doesn’t remove the impulse when presented with a child or markets in meltdown. Experience and practice are the best ways to learn and unfortunately there are no shortcuts for this. Our best advice remains to take a step back before any investment decision, take time to deliberate why you are making this decision and if this makes sense given your goals for being invested.

One shortcut is learning from the experience of others, those who have been successful. Warren Buffet remarked “The most important quality for an investor is temperament, not intellect”. Although Buffet is quoted ad nauseam it’s for good reason, he is eponymous with disciplined and successful investing.

In our experience we believe that the fear of market meltdowns is actually more threatening to your returns than market volatility itself. We don’t seem to be alone in this.

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.

Peter Lynch

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