How can investors deal with the coronavirus market impact?
When markets look worrying, a ‘prepare, don’t predict’ approach can often be the best strategy for ISA savers.
Please remember that as with all investments, your capital may be at risk.
As 2019 came to an end, we believed there were a number of risks that savers would have to watch out for – we wrote about the US election, the trade war, and Brexit negotiations – but one risk that nobody saw coming was Covid-19.
Towards the end of January, though, we recognised the potential for the coronavirus to escalate and materially affect the economy in China and beyond. Our first thoughts are of course with all those affected by this illness, but we also have a responsibility to our customers to think about the financial implications of this tragic outbreak.
The challenge is that the level of uncertainty around the coronavirus is extremely high. As John, our Head of Multi-Asset Funds, told Bloomberg last week, it is a black swan event: unpredictable and impossible to quantify in its gravity and market impact.
What can savers do? Prepare, don’t predict
Preparing for what may happen is often a much more productive strategy than trying to predict what will happen next in markets. Many people are tempted to ‘time the market’ and sell their investments when they see the value of their savings drop a little.
But timing the market is incredibly difficult and many of those who are paid to do it still don’t get it right all the time. As we’ve talked about on this blog before, we believe there are lots of reasons for long-term investors to stick with their ISA in jittery markets and for why doing nothing may be often the best strategy.
It can be tough to overcome our own worries when the headlines seem so loud but we believe staying invested in volatile times is crucial. Keep in mind that ISA investments are for your long-term future and can come with a host of benefits besides – but this comes with risk to your capital.
It’s important during these times to remember what it is that your ISA savings are for and if you have the level of risk that may be right for you. Our ‘We do it for you’ range is designed to take the stress out of investing and stick to a risk profile that you may be more comfortable with.
How are our fund managers responding?
The Multi-Asset team built different scenarios to plan ahead for their funds, covering possibilities including:
- The market impact of a full pandemic
- A mild ‘contained’ virus scenario
- The global economy suffering an initial hit but recovering relatively quickly
With that in mind, we’re keeping to the simple but effective strategy of making sure that our funds are spread across a lot of different types of investments. Multi-asset funds aim to balance your risk and so if one part of the market or a region experiences sees a sudden dip in value as we’ve seen recently, the impact to your ISA investments are potentially lessened.
What next for markets?
With markets experiencing one of their worst weeks since the financial crisis, many investors are looking to central banks, like the Bank of England or the European Central Bank, or to governments to provide support for investors’ savings.
Indeed, at the end of last week, the Federal Reserve announced that it would “act as appropriate to support the economy.” Today, the Bank of England similarly pledged to take any necessary steps to protect economic stability. Cutting interest rates and providing additional funding to businesses may not fix the underlying issue, but they can do a lot to remedy the concerns investors have about the impact of the coronavirus.
Of course it’s possible that the markets may fall further in the future. When markets have been on a steady rise over the last ten years, even a little turbulence in your investments can feel scary. We believe the important thing is to stay disciplined, don’t let short-term emotions get the better of your long-term savings goals, and aim to make sure your savings or funds are spread across different types of investment or regions, which can help lower your risk.
We hope that the above information is useful. If you’re uncertain what’s best for you savings, investments and pensions, it might be a good idea to consult a professional financial adviser. You can find a full list of authorised financial advisers in your area here www.unbiased.co.uk