One year has passed since the first COVID-19 case was reported in mainland China. Ever since the initiation of the outbreak, short-term planning has always remained in doubt. Whether catching up with friends or going on a trip, plans remain in limbo to the last day, as governments set restrictions overnight in order to tackle the current epidemic − to strike a balance between business and social life. The same cannot be said for investing, as a long-term investment plan remains crucial.
The use of technology over the past 10 months has certainly become instrumental in our everyday life, with companies shifting their business online in order to have the widest reach possible. As investors sensed that the pandemic will speed up certain technological trends, demand for tech-related equities jumped. The Tech DAX in Germany gained 40 per cent since mid-March and the tech heavyweight NASDAQ 100 in the US posted a whopping 65 per cent gain during the same period.
To be speculative and put all your eggs in one basket is relatively risky, especially during this time. In fact, one must diversify as much as possible in defence of such periods of extreme volatility, hence mitigating the diversifiable risk as much as possible.
As one of my colleagues wrote recently, having an investment plan is key to remain committed to your plans and avoid panic selling when markets turn volatile. This year has clearly been a reminder to all investors. We have not had the kind of market sell-off we experienced back in February and March in ages.
As the situation worsened, sellers outnumbered buyers and markets declined sharply. With hindsight, and generally, we can safely say that those investors who panicked and sold their portfolios did not take the right decision. Most markets have recovered and others have come a long way from the lows touched in late March, as governments and central banks announced stimulus packages to keep economies floating. More recently, news about a number of possible vaccines gave markets a further reason to be cheerful.
One cannot be short-sighted and panic, which in turn causes investors to take snap decisions and sell their investments or buy stocks on an impulse. No matter how experienced you are in investing, timing the market is difficult and hence, having a well-defined investment plan built around your investment objectives and risk tolerance helps you avoid panic selling or take other irrational investment decisions.
Hasty decisions during volatile market periods could make a difficult situation even worse
For long-term investors, holding on to your investments even during downturns has generally been an effective strategy assuming that your financial goals and situation remain unchanged.
Patience is a virtue
When investing for the long- term, patience plays a major role. Every financial instrument has its own cycles with news affecting the market value of the investment – this year was no exception. During periods of high volatility, investors ideally should avoid continuously checking the value of their investments.
Every market downturn is unique and it is difficult to predict the next one. That said, evidence supports being optimistic when thinking about the long- term. Markets have historically recovered from downturns and continued to grow.
During such a time, investors tend to be alienated by the situation and tend to lose focus on their long-term investment goals which will consequently result in an irrational reaction to every bit of new information. From an investment point of view, hasty decisions during volatile market periods could make a difficult situation even worse. Research shows that investors who sell off when markets decline and go back in when markets recover, tend to generate poor returns compared to those who stick to their investment strategy or possibly add more money during the sell-off.
Positive news on the vaccine front has filled investors with hope and has helped investors visualise a more positive picture for the months ahead. In fact, the month of November was characterised by positive clinical results issued by Pfizer/Biontech, Moderna and Oxford University coupled with the US election results, which fuelled demand for the stock market with inflows into equity funds hitting a 20-year high, reaching $44.5 billion according to EPFR Global.
Planning your strategy
When holding investments, strategy is key. Renowned investor Benjamin Graham compares buying and selling stocks on a short-term horizon to gambling, saying that true investing takes place over a longer period of time. In fact, passive investing, or buy-to-hold investing, works better for people seeking a slow-but-steady growth of wealth in the long run, given that the instruments in their portfolio are well diversified and researched.
None of what has been discussed can happen if we focus solely on the events happening right now. But if we want to build future growth, then we need to look ahead.
Julian Mangion is an investment adviser at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company and their clients, are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on 2122 4410 or e-mail julian.mangion@jesmondmizzi.com