This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult our financial planning team here at Vesta Wealth Limited in Cumbria, Teesside and across the North of England.
At the time of writing in May 2020, many people are still concerned about their investments and pension pots. The Covid-19 pandemic and resulting national lockdowns have sent shocks throughout global stock markets, with the first quarter of 2020 ending a near-11-year bull run since the end of the 2008-9 financial crisis. At Vesta Wealth, our financial advisers have been helping people in Cumbria, Teesside and across the North of England deal with the current situation and make good long-term investment decisions based on clear thinking, and sound evidence.
One common question which our financial advisers have regularly encountered regards investment strategy. In other words, should investors change their approach in light of the pandemic? Does it justify moving investments more towards ‘cautious’ or defensive assets, at least in the short term, or might the situation even warrant a more aggressive investment approach?
Here, our financial advisers offer some thoughts on these important questions. We hope you find this content useful. To discuss your own financial plan, please get in touch:
t: 01228 210 137
e: [email protected]
Reactive vs. long-term investing
Imagine you have a portfolio (or pension pot) where the balance is 80% stocks (shares), with the 20% remainder comprising other assets such as bonds (loans). In the first quarter of 2020, a portfolio like this will likely have suffered more compared to, say, one comprising 60% bonds and 40% stocks. That’s because bonds tend to be a ‘fixed income’ security which suffers less from the kind of stock market volatility seen in recent months across the UK, Americas and Europe.
Since the second type of portfolio is likely to be more ‘protected’ during the Covid-19 ‘bear market’ (if we can call it that), then doesn’t it follow that all investors should switch to this more ‘cautious’ investment approach before things possibly get worse (e.g. in the wake of a possible second wave of the virus)? Not necessarily.
Bear in mind that things are rarely as simple as changing the percentage of stocks and bonds in your portfolio, at the click of a button. Increasing your percentage of fixed-income securities means either buying more of them (which might require a considerable amount of liquid capital e.g. cash savings). Or, it means selling some of your stocks and possibly using the proceeds to buy more bonds. The problem with this approach is that if you do this during a market downturn, this simply serves to crystallise your losses.
Remember, although the value of your stock investments might have gone down in the short term, you haven’t actually ‘lost anything’ until you sell. Quite often, staying in the market can result in greater rewards in the future.
Trusting the strategy
Unless you have a really good reason to change the investment strategy you agreed with your financial adviser (maybe years ago), it’s probably a bad idea to change course dramatically during a period of volatility such as what we saw in March 2020. It might be appropriate to reconsider your approach if your attitude to risk has changed, or if your financial goals have shifted. Otherwise, speak with your adviser about your concerns. Part of their role is to act as a professional sounding board for your questions, worries and ideas. Make use of that value he/she offers!
A long-term perspective
One of the biggest challenges for any investor experiencing a volatile market is keeping the bigger picture in mind, and not becoming distracted by short-term losses. Here at Vesta Wealth, for instance, our financial advisers have regularly been reminding people about how the stock markets, historically, tend to recover from periods of decline and go on to surpass their previous performance.
This occurred following the 2008-9 financial crisis, for example. At the time, many investors saw nothing but gloom in the markets and, therefore, abandoned them. Those who ‘jumped ship’ at lower points thus crystallised losses, and many will have missed out on much of the 11-year bull market growth which emerged afterwards. Consider that the United States S&P 500 Index, for instance, stood at about 1,413 in May 2008 before falling to a low point of 683 almost a year later. Yet by January 2020, the index had grown to over 3,265.
This isn’t to say that no risk is involved with stock market investing, or that historic trends will necessarily be replicated in the future. However, it is a reminder for investors to keep focused on the long-term strategy they originally established with their financial adviser.
Conclusion
Professional financial advice has long had its merits. Yet during difficult times in the markets and wider economy, these become even more apparent. Quite often, great value is gained simply by having a second set of eyes on your portfolio, who can help you ‘step back’ and see the picture more clearly than when you are up close to it.
If you are interested in discussing your financial plan, please get in touch with your financial adviser at Vesta Wealth in Cumbria, Teesside and across the North of England. Reach us via:
t: 01228 210 137
e: [email protected]