In recent weeks, we have seen a major correction occur in the domestic and global share markets. This has been a direct impact of the coronavirus and the potential impact on company profits. In market terms, the Dow Jones is now down over 12% from the peak reached on the 12th of February as panic has caused huge sales across the markets.
We have seen significant impacts on tourism, education and manufacturing industries due to travel bans around the world. This impacts the global economy and the profits of many companies.
Sharemarket investors often respond emotionally to these events. Uncertainty and fear cause many investors to sell indiscriminately. This is not new. With the uncertainty of the Coronavirus, we have seen “the good the bad and the ugly” all getting sold heavily as investors are getting out of the market.
In volatile times, it is important to take a step back and consider:
- The correction is happening when many share markets around the world have reached record highs on investor optimism of continued world growth, with many stocks arguably in over-valued territory.
- While the coronavirus is being taken very seriously by government authorities, so far, the virus has led to around 3,000 deaths. To keep this in perspective, it is worth noting a 2017 World Health Organisation study attributed between 300,000 and 650,000 deaths per annum from the annual influenza virus.
Clearly this will be a bad month for investors with losses recorded in every sector. All share portfolios will also be negatively impacted by the current correction as all stocks get sold off heavily. Panic is rarely an appropriate response. It is important to keep in mind there have been many other times when the market has been impacted by a big event (as per the graph below). Over the long term, these events have been resolved and businesses continue.
When reviewing your position in the face of bad news it is important to remain objective and remember some key principles behind investing.
- Maintain a cash reserve, volatility is nothing new; elections, Coronavirus, SARS (bird flu) and oil crises have all caused significant reductions in market. In most cases, the market recovers quickly. A cash reserve will prevent you from being forced to sell your shares at the bottom of the market.
- Diversify your holdings. You don’t want to be overexposed in any one area. Having a good spread of your investments substantially reduces your risk.
- When selecting which businesses to invest in, focus on good quality businesses. Avoiding businesses with high levels of debt with no buffer for the uncertainty.
- Try to avoid stocks with unproven business models that have been optimistically valued by speculators. They usually perform much worse than companies with established operations.
It is impossible to determine when the current volatility will settle. However, when the share market does recover, good quality companies with real businesses and sustainable earnings and dividends will again be well sought by investors and should recover well.
If you have any concerns, please do not hesitate to contact David van den Berg from Adrians Private Wealth.