Stock markets are moving around like a child on a jumping castle.
If you observe the herd mentality of those clearing out the stocks of toilet paper from the shops, you have an inkling of the limited thought being applied by investors who are selling shares at this time. Rational investors are watching events with interest and doing very little.
The best investors are starting to gradually buy quality assets at great prices, but they are moving slowly and with great fortitude. If you are in a state of panic (or even worse) are selling all your shares now, you are doing yourself a great disservice.
The moves are big
Some people are saying that this current market crash is a once-in-a-lifetime event. I think that is a foolish comment.
I started in the investment markets in 1996, just in time to experience one year of rising markets before the Emerging Markets crashed.
Soon after, markets crashed again with the IT bubble that burst in spectacular fashion. Since then we have had many notable market events, including the 2008 financial crisis.
These crashes were hard to predict, and markets recovered after all of them. Investors who sold out in the middle of the crash lost money forever and those who did nothing, recovered their losses and made profits again. It is nearly impossible to understand why it will be different this time.
The reasons are varied
I have had many conversations with investors over the last few years about the US stock market. We generally agreed that the market was expensive and that it was due for a pause or a bit of a drop. No one foresaw that the market would crash because of a coronavirus from China.
Unfortunately, the stock market was also impacted by a new trade war between Saudi Arabia and Russia, two of OPEC’s biggest oil producing members. To make matters worse, interest rates on US government bonds (US Treasuries) dropped suddenly and posed a real threat of reducing to negative interest rates.
The markets were impacted by three major events in a very short space of time. However, none of them are structural issues that will change the way the world works. If anything, increased awareness of sanitation and the benefits of the efficiency of online meetings and working from home might force a change for the better.
Central banks have done what is necessary
I really like the action taken by the US Federal Reserve in recent weeks. They took decisive action to limit the financial impact on the economy. They ensured that the financial system will not grind to a halt by giving comfort to banks by providing additional capital and sureties that are necessary in times of crisis.
Similar action has been taken by other central banks around the world and this will mitigate the economic impact that is currently being felt globally.
If you need income
If you live on the income from your assets, there is no benefit in selling your investments now. If you feel the need to act, try to reduce the income that you withdraw from your investments.
I’m not suggesting you change your lifestyle, just try to cut where possible. In addition, try to delay big expenses that are not essential now. For example, if you were planning to buy a new car, delay this decision if it means that you must sell some investments to raise the necessary cash.
If you want to buy shares
I think it is absolutely the right time to consider buying investments now. However, I would not rush to invest all the money at once.
Rather take time and phase your purchases over a period of months. For South African investments, I would phase in my purchases over three months and for international purchases, I would take six months.
My reason for the accelerated SA purchases is that SA is really cheap now. There are brilliant companies on offer at crazy low prices. The US stock market is not really that cheap, it is probably at fair value now, i.e. not cheap or expensive.
Act slowly now
If I can leave you with one message in these times, resist the urge to act quickly with your investments. These market events always feel overwhelming and devastating.
However, they all pass and investors who don’t panic tend to profit from the crashes. If you are feeling optimistic and want to buy shares, I agree with you, just do it slowly and over a period of months!
Warren Ingram is a Director of Galileo Capital and hosts the HonestMoney Podcast.