It has certainly been an interesting couple of weeks. From people having literal brawls over stockpiling certain paper products, to deciding that profitable, multi-billion dollar companies are now somehow worth 7.5% less after just a 24 hour period, with little to no new information apart from a fall in the oil price.
Whilst this article in no way means to downplay the current state of affairs and the impact the Coronavirus will have, it does attempt to shine a light on humanity’s tendency to react in quite bizarre ways, fuelled out of fear.
It is true that the current Coronavirus is a fluid situation, with no way of knowing the extent of the impact it will have in the short to medium term. I, too, have misplaced my crystal ball and therefore cannot predict the outcome. It is for this reason that the rational course of action is for investors to focus on their long-term goals (if you have short term goals, why on earth are you invested in growth assets!), and to ensure their portfolios are constructed in a way so that the inevitable short to medium term market events (which will always occur) do not derail what you want to achieve.
Putting aside the shameful behaviour of securing your ‘rationing’ of toilet paper, my expertise is around investing….so I will leave the commentary regarding toilet tissue to Kleenex. The purpose of this article is to provide some investment fundamentals; something which the media/social media has failed to do.
What does one do in times like this, when we hear the media tell us that “$X billions of dollars have been wiped of the share market”? That depends entirely as to why you have invested, and as to whether you are anticipating exiting the market in the short term. Assuming that you are invested for the long term, what is the course of action that historically is the most proven formula to wealth creation? Simply...
The most positive days, more often than not, follow a period of major sell-offs. Therefore, selling when markets are in turmoil, and buying when markets recover, results in setting-fire to one’s wealth. Let me illustrate, using history as a case in point.
If we consider the 20 years up to 31 December 2016 (including the lead up, and the entirety of the GFC), if someone was invested for the full period, the average annual return would have been 8.8% p.a. HOWEVER, if they missed just 40 of the best days of this period (ie. 2 of the best days per year on average), their 8.8% p.a. return would have fallen to 0.6% p.a. This is illustrated in the below table.
To put this in real terms, if you invested $100,000 at the beginning of the period and reinvested the dividends, you would have had $540,229 if you remained invested for the entire period. If, however, you missed on average just the 2 best days per annum, the $100,000 would only be worth $112,709. Yet, it is the human tendencies to do that exact same thing….to flee to Cash.
One does not need to be a genius to realise, should the best periods typically follow the worst periods of time, that selling when markets have fallen heavily and buying back when they recover is one proven way to destroy your wealth creation.
The table above shows the returns Australian Shares investors would have achieved in the 20 years to 31 December 2016 – taking out the best individual days. Sourced from BT’s publication ‘Risk Profiler Information Pack’, dated 1 April 2017.
Keep in mind, for every seller, there is a buyer who is seeing an opportunity. It is quite impossible for a share to change hands without a person on the other side of the ledger…someone who is seeing a long-term gain.
Having been in the finance game throughout the Asian Currency Crisis, Dot Com Crash, September 11, Iraq war, SARS, GFC, Swine Flu, Mad Cow Disease, Grexit, Brexit, the fear of a Trump Presidency, the inverted yield-curve, and now the current geopolitical event, COVID-19; I can assure you that geopolitical events are nothing new, and will repeat into the future. Each one of the abovementioned events significantly concerned markets (and the media), and if one was inclined to flee to Cash/bonds on each occasion, the result on their portfolio would have been catastrophic. If one has their head in the sand, and does not position their portfolio in a manner to weather such events, then the old saying goes “a fool and his money are soon parted”. But for the astute investor, if your ‘house is in order’, please turn off the media, and focus on your goals…wealth is created over a life time.
About the Author
Glenn Baker is a Senior Financial Planner, and Principal of Adept Financial Planning Pty Ltd, a Corporate Authorised Representative of the Capstone Financial Planning Pty Ltd,
AFSL 223135 ABN 24 093 733 969.
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