The Coronavirus Pandemic

Blackbear Financial Group > News > Investment Planning > The Coronavirus Pandemic

The current Covid-19 pandemic is having a significant short-term effect on the financial markets, and as a result, your investments. There is a great deal of uncertainty at the moment, and so I would like to offer some commentary on the situation to hopefully inform, reassure, and instill some confidence in you regarding your investments.

Unprecedented?

Many people have commented on how unprecedented current events are. The word “unprecedented” is simply not helpful here – as it creates fear. You should remember that 9/11 and the 2008 financial crisis were also totally unprecedented and had dramatic effects on financial markets. However, over time, the financial markets recovered.

Graph A: An overview of a typical economic cycle, where periods of contraction (slowdowns, recessions) are followed by periods of expansion (accelerations, booms). Source.

Financial markets go through cycles of bull markets and bear markets throughout history, and since 2008, we have experienced a 10+ year-long bull market.

Whilst a global pandemic has not taken place like this in recent memory, there is nothing to suggest that the markets will not recover from the current situation.

I should add that the 2008 financial crisis was a significantly worse economic situation. The 2008 recession was known as a “balance sheet recession” – meaning that companies’ balance sheets were fundamentally poor, and businesses were struggling as a result of economic fundamentals rather than external factors. The uncertainty surrounding Brexit over the past 3 years has meant that UK businesses were preparing for uncertainty and had measures in place to cope with issues, and as a result, business’ balance sheets were much stronger going into the current economic contraction than they were 12 years ago.

So, what about the stock market?

A company with equities listed on a stock exchange will have a book value and a market value. The book value is essentially the value of the company per share issued according to the balance sheet, whereas the market value is what investors on the stock exchange believe a company to be worth and will therefore trade shares in companies at the listed market value.

As the balance sheets of companies were stronger going into the pandemic than they were in the 2008 financial crisis, many companies are now trading at a considerable discount to their previous book value given the recent falls in value of the FTSE. As a result, there are potentially many equities currently offering excellent value as companies will start to perform well once the pandemic has settled.

Many investors are already taking the current opportunity to invest in these companies, hoping for growth to pick up after the pandemic by investing in company shares that they believe to be good value.

So, what does that mean for you?

It is pertinent at this time that I remind you that you cannot lose all of your money. Additionally, you only lose money when you sell to crystallise your losses. What you are currently experiencing is a “paper loss” which has been caused by the market value of your investments falling. But remember; you only lose when you sell.

An investor’s best long-term strategy in a situation like this is to remain invested, stay patient, and keep calm. The old cliché of it is time in the market not timing the market that holds true in a situation like this, because it is impossible to predict exactly when the acceleration part of the economic cycle is about to begin once a recession is over. The acceleration period often has some of the highest growth in market values of assets out of any period in the economic cycle.

Graph B: Graph showing the returns over 10 years of the S&P 500 index if the 10 best market days were missed (yellow) compared to the returns if the investor remained invested throughout the decade (blue).

The above graph clearly shows just how much of an impact disinvesting can have on your long-term returns – even just for 10 days out of a decade. The truth is that the best days in the stock market often follow shortly after the worst days, and that “household” investors are disproportionately likely to panic-sell in difficult times.

Remaining optimistic, patient, and calm is the best strategy available to you in the situation that we are all currently facing. You only lose when you sell, you can’t lose all of your money, and the markets will recover.

Please understand that given the circumstances, we’re all exceptionally busy at BlackBear and current government recommendations mean that we cannot function at full capacity at the moment due to availability of staff and resources. However, if you have an urgent financial matter or feel that a near-term goal of yours has been significantly affected by recent events then please contact me or anybody else at BlackBear. Otherwise, I will do my utmost to keep you all informed of relevant events as the situation unfolds.

Remain optimistic, patient, and calm.

Best regards,

Andrew Anderson, Dip PFS

Leave a Reply

Your email address will not be published. Required fields are marked *