“Panic causes tunnel vision. Calm acceptance of danger allows us to more easily assess the situation and see the options.” Simon Sinek
Undoubtedly, the COVID-19 pandemic has generated panic, though thankfully it seems to have waned a little as we all acclimatise to the new rules.
A medical crisis like this taps into our human psyche and brings forth strong emotional responses. Actions that were once considered irrational can become accepted norms. Our survival instincts kick in as witnessed by the empty supermarket shelves.
Another core response we have is our fight or flight reaction and in respect of investments markets we have seen lots of the flight response with sellers greatly outpacing buyers. This response has been so strong that the US Dow Jones Index just recorded a quarterly fall of 23.2% – its biggest since records began. In conjunction, the US S&P 500 index fell 35.4% from peak to trough during the period.
As advisers we believe that in a crisis our job is to:
- Not get swept up in the hysteria and to step back and rationally assess the situation for what it is and then take decisive action; and
- Communicate clearly and regularly with our clients.
We pride ourselves on being accessible to our clients and during these anxious times make sure we are in regular contact, helping them navigate a course and positioning their portfolios for when we come through these dark times.
Regarding stepping back and assessing the situation rationally, that is what we excel at. While no correction is ever truly the same, the emotional responses quite often are. We helped clients through the GFC, and we’ll help our clients through this.
For our more bullish clients the most common question we are fielding at the moment is whether they should be buying into some of this market weakness.
The answer typically depends on how you view the world. Have we seen the bottom in the equity markets? Possibly. There is no doubt that the stimulus packages announced both here and offshore will be supportive to both economies and markets, though whether they will be enough to offset the current closure of the world remains to be seen. Nevertheless, for clients with a more aggressive risk profile, small increases in market exposure will be rewarded over the long-term.
What causes us some hesitation is the potential for far higher mortalities out of the US and the economic impact upon quarterly corporate earnings which are due to start being reported this week. For these reasons we have been advocating a cautious approach.
For example, we have been recommending selectively moving some of the fixed interest investments (that have provided stability through the falls) into cash in preparation for the time that we would actively buy high quality assets at far cheaper prices. As noted above, for clients with a higher appetite for risk we have been carefully allocating some of that cash back into growth assets, though we are still wary of being too aggressive given the many paths the virus can take.
Where we do have more conviction is in the currency hedging of international assets. Historically, the Australian dollar rarely trades below $0.60 against the US dollar for an extended period and with the dollar recently trading below that key level we have been switching into more hedged currency positions.
Looking at asset prices daily we can see plenty of opportunities, though our horizon remains somewhat foggy as to the economic damage that has been, and will be, inflicted. Now is the time for rational thinking and long-term strategies, not knee-jerk reactions generated by panic.
As we all practise social distancing, some of us will also become socially isolated. To those people, please reach out to family, friends or even us. It could simply be a case of saying hello or seeking a different perspective. With two bored teenagers in my house, please do not hesitate to contact me as I also need a different perspective to constant YouTube and Tik Tok videos. I repeat, please do not hesitate to contact me.
Andrew Aylward is Chief Investment Officer at Keep Wealth Partners.
Keep Wealth Partners Pty Ltd (AFSL 494858). This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from a financial planner who can consider if the strategies and products are right for you.