In the last week we have had the first large scale market scare in over a decade.
The Coronavirus and the associated economic implications has become the catalyst for a sharp drop in investment markets. The Dow Jones dropped over 10 per cent in the week.
Almost everyone is familiar with the concept of buy low and sell high when it comes to the share market. Everyone knows what they are supposed to do, but what we saw last week, like so many times before, is that when markets started to fall fear set in. Thursday and Friday saw huge sell-offs as the market fell.
My office received a number of calls, some wanting reassurance and others wanting to know if they should invest in other options.
The answer is stick to your plan.
The Coronavirus will impact the profits of many companies in the short to medium term, however it is hard to argue that they are worth on average 10 per cent less than they were a week ago.
We know that we should sell assets when they are high, yet people are scrambling to sell their assets for 10 per cent less than they could get last week. This is the fear cycle at work.
Growth assets should be viewed as a long-term investment and we should be measured as such. Despite the fall in share prices last week, the markets are still up for both the financial year and last 12 months.
They have an average year on year return of over 10 per cent over the last 10 years. All of this has been forgotten by many investors after a single week of losses.
One client rang concerned she had lost money as her balance had declined. I pointed out that she had been invested for three years and had over $100,000 more in her account than she had deposited.
Although she had $12,000 less than her high point, she hadn’t lost $12,000, she had made over $100,000. By viewing the investment with such a short-term view, what had been a terrific investment was looking like a poor one.
Assuming you have a diversified portfolio and a risk profile that is compatible with your investment time horizon it is essential you avoid the panic and stick with your long-term plan. Although the Coronavirus is a relatively unique experience, share market crashes are not. In fact, quite the reverse, they are inevitable.
Whether this recent event is a short-term drop or a more sustained period of lower performance is yet to be seen. Either way, both situations are normal and part of the investment cycle.
Alex McKenzie, Future Financial Services
Alex McKenzie is a financial planner, and the owner of Future Final Services in Penrith. He is a graduate of Western Sydney University.