The virus: a time to invest wisely for the long term and to take professional advice

How long will the coronavirus last, what impact will it have on the global economy and have we hit the bottom yet?

A message from Keith Littlewood at Blacktower Financial Management

As I write from my desk at home, it strikes me how quickly we are getting used to this new reality...

Since the last article we published we have witnessed some of the largest daily fluctuations in stock markets since the financial crisis, the latest being a jump in most indices of well over 10 per cent following the 2-trillion-dollar stimulus package agreed on by the US congress.

The volatility of the last few weeks comes on the back of continued concerns over the virus, how long it will last and its impact on the global economy. When discussing this with colleagues and clients, and when reading reports from fund managers and the financial press, the primary concern is the human dimension and the health of loved ones, but after that, of course, the shrinking of the economy and our clients’ interests are of paramount importance.

For new investors this can be an extremely worrying time as they will not have been used to such short-term volatility. For seasoned investors who went through the financial crisis of 2008, the technology bubble of 2000 and even black Monday in 1987, though, the short-term pain being witnessed at present can be seen as a confirmation that although stock markets can’t always go up, over the long term they have done so.

How long will we continue to see these jumps? It is generally assumed now that with this latest contraction a recession seems inevitable. Whether it will be a V-shaped one (i.e. with a quick, strong recovery) or a U-shaped one (where the bounce-back can take much longer), however, is a popular topic of discussion.

Some analysts say this contraction could prove the shortest ever, suggesting it could last no more than two quarters as opposed to the average of four quarters. As the cause of market stress is a public health crisis rather than a leverage or profitability crisis, fundamentals would improve when we have a peak and then a slowdown in Covid-19 daily infection rates in the US and Europe.

Have we hit the bottom yet?

Another question often raised is whether we have hit the bottom yet. At the moment we are still very much in an “over-reaction” phase, but the next two weeks will be critical to see the effects of the containment measures and to estimate the potential length of the economic contraction. Until then we can expect the high volatility to continue.

For long-term investors and fund managers alike, this offers new buying opportunities. However, markets are unpredictable, so it would be wise to spread your risk through diversification in a longer-term investment strategy, keeping a few core principles in mind:

1. Diversification – diversification – diversification: The best long-term portfolio is one that is diversified across asset classes such as stocks, bonds, cash and property as well as being spread geographically, not being solely reliant on one economy such as the UK or US.
2. Start investing early if you can: Compound interest can have an incredible effect on an investment portfolio.
3. Think twice before putting your money into cash. With low interest rates likely to stay with us for a long time, the eroding effect of inflation cannot be overstated.
4. Invest for the long term and stay invested: trying to time the markets is really only done by luck, missing the best up days can be as bad as enduring the worst down days
5. Always take professional financial advice: emotions can play a key part in an investor’s decision-making and a rash decision could have a negative impact on your portfolio. An adviser will review your portfolios and guide you through the investment cycles.

Please remain safe with your health and your wealth and contact us if you would like us to review of your portfolio or would like to look into the opportunities that undoubtedly lie ahead.