Coronavirus and investment markets #2

Two weeks ago we provided some thoughts on the Coronavirus and it’s impacts on investment markets. A fortnight later, we can see share markets around the globe have fallen significantly further.At the time of writing, the US market is around 20% below it’s all-time highs of only a month ago, and the Australian closer to 25%. Key drivers of this have been further spread of the virus (and official pandemic status from the World Health Organisation) as well as a sharp increase in oil production (and resulting fall in crude oil price).

While it can be alarming to see such falls in investment values, it’s important with investments (as with many things) to think rationally. As Stephen Arnold from Aoris Investment Management points out in this article, the value of a company’s share is essentially a current value of it’s entire future profits, forever. Logically, we know that economies and businesses will have a profit hit from the virus and associated containment measures. However we know that this will be a temporary condition, relative to the long-term economic activity that will naturally resume once the dangers pass.

So it would seem that some level of share price adjustment is warranted by the real economic impacts, but there is also a degree of “panic selling” of quality investments, just as there has been widespread “panic buying” of household essentials.

What does this mean for investors?

It’s important in periods like this to remember that you’re an investor, not a speculator. The time-horizon of the two is very different. A speculator is trying to profit off short-term price changes, especially when excessive fear or greed are driving markets. An investor on the other hand is looking to accrue, or hold, a sensible long-term portfolio of assets and “tune out” the short-term volatility and headlines.

In the case of clients who are still working and building their wealth, these events usually prove to be a fantastic buying opportunity. This is either realised through regular super contributions, or ad-hoc additions to investments in response to the falls (ie “buy the dips”).

For retirees, it’s important to remember that periods like this are expected occasionally, and that portfolios are typically set up to include a significant holding of cash and bonds to provide short to medium term funds and “allow you to be patient” with the shares and other growth assets (which suffer from the volatility we are seeing now).

In both categories, to panic sell really does mean to lock in your recent declines, and usually miss out on the eventual recovery. As history’s most famous investor, Warren Buffet, famously said, “the stock market is a device for transferring money from the impatient to the patient”.

As always, if you have any questions or concerns please speak with your financial planner, or contact us


Published : 12 Mar 2020