Should investors be taking the bull by the horns or running for cover?
The number of times the word ‘unprecedented’ has been used in relation to the COVID-19 pandemic by the press and on social media is probably, well, unprecedented.
But the current pandemic the world is currently suffering through, alongside the social and economic fall-outs, is actually not unprecedented.
Cities, countries and even empires have been brought to their knees by infectious diseases many times before.
In the mid 6th Century the fall of the Byzantine Empire was kick-started by an outbreak of Bubonic Plague. In 1665 as much as 15% of London’s population was killed by plague. And as many as 1.4 billion people were infected, and possibly more than half a million killed, by Swine Flu just over a decade ago. Even the Lockdown and measures which exert huge negative impacts on the economy are not entirely unheard of. Catherine the Great, for example, moved all manufacturing out of Moscow in efforts to contain the outbreak of plague.
At this point you might be asking yourself why we’re adding to all the present doom and gloom by writing about past doom and gloom. Perhaps ironically the reason is to provide comfort that this is not the first time the world has faced dire circumstances, and to reassure that ultimately it has recovered.
The question is what can investors be doing now to protect their current financial wellbeing and financial futures for when the recovery starts to kick in?
Don’t Lock In Your Losses
When it comes to investments this advice is all important, but is also often the hardest to follow because it requires nerves of steel and a sound working knowledge of the markets.
Remember, the moment you sell is the moment you’ve locked in the price you’re going to achieve. Up until that point, in theory at least, the price is moveable. Up, as well as down.
So, in practice, if the price of your investments has fallen, for example, five per cent, and you sell at this point, you’ve effectively locked in that five per cent loss.
If you hold on of course there’s always the chance they could fall even further, but there’s also the chance they could recover or even surpass the previous value.
Before deciding whether to sell or not the questions you need to ask yourself are ‘can I afford to hold on with the possibility of recovering these losses, whilst accepting I also risk losing more?’ and ‘what are the chances this investment will turn itself around, and (importantly) when is this likely to happen?’
Knowing the investments you hold and the markets in which they operate will help you make informed assessments of the latter question. Knowing your personal risk profile and having a handle on your entire investment portfolio will enable you to answer the former.
We’ve said it before, and we’ll say it again: Diversify
Which brings us nicely onto the issue of a holding a diversified portfolio.
Your risk profile will be connected to how balanced your investment portfolio is. If you have a good spread across a number of asset classes in different markets and a range of sectors, you’re going to have a more robust risk profile.
What you risk losing on one you could potentially gain on another, so you are not wholly exposed to the downside of any one investment.
Of course it also means you’re not exposed fully to the upsides either, but there’s a reason we all know the expression ‘don’t put all your eggs in one basket’.
During global economic problems, particularly ones like the current COVID-19 epidemic, it can often seem as though your entire portfolio is taking a hit because the ramifications are widespread across all types of businesses and all types of investment.
But recovery will happen eventually, and some businesses will do better than others.
So, if you haven’t already, take the time now to get to know your investments better to identify those likely to recover and the associated timescales. Then use this information to recalibrate the balance of risk in your portfolio according to your personal circumstances.
How to sell if you have to sell
And lastly, remember, if you are minded to sell it doesn’t mean you have to sell all at once.
Using the technique of pound-cost-averaging it’s better to drip buy and drip sell, so you can incrementally increase or decrease your exposure.
This takes some of the immediacy and overall weight out of making these sorts of decisions, giving you a bit of breathing space and the ability to act cautiously.