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TIME TO BE GREEDY WHILST OTHERS ARE FEARFUL?
by Sam Hulson of First Equitable
As the Coronavirus has spread rapidly across the globe, global stock
markets have been plummeting in equally dramatic fashion, as fear and
uncertainty concerning likely short and longer-term impacts resulting
from the virus are considered by scientists and economists alike.
In times such as these most clients are asking one or both of the following
questions:
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Should I be taking any action with respect to my portfolio?
Is now a good time to invest?
The first question is obviously much more client specific and the reality is
that if you have made an investment under the guidance of a professional
then the only thing you should need now are a few words of reassurance!
Taking a proactive approach and planning in anticipation of what could
happen is always preferable to a reactive approach when often it is too late
and the damage is already done. Making rash decisions when markets have
already plunged often proves very costly as it typically means crystallising
losses. If you are planning on taking retirement and/or making significant
withdrawals in the near future and hadn’t planned in advance by de-risking
part of your portfolio, then you would be advised to seek professional
advice before taking any decisive action.
The correct answer to the second question will of course still be very
much client specific and dependent on overall circumstances, risk profile
and investment objectives. However, we can also answer more easily in
a generic sense. Global equity market valuations are now (at the time of
writing) much lower than they were a month ago and so many people are
now wondering if a major opportunity has presented itself?
My personal opinion is that I do think it represents a fantastic investment
opportunity for long-term investors, as given time, global stock markets
will no doubt eventually recover from this setback. However, key to the
suitability and profitability of any investment is the time horizon and for
anyone looking for short-term opportunities or a ‘get rich quick’ investment
would be playing a dangerous game. The Coronavirus situation is most
likely to get worse before it gets better and should the overriding feelings
of fear and uncertainty continue to dominate, then panic and irrational
behaviour is likely to ensue within financial markets.
Valuations
The first reason I believe now could be a good time to invest is simply that
valuations are far lower than they have been for a considerable amount
of time. If we use the FTSE100 index as an example: The index has fallen
from around 7,500 points to just 5,000 points (at the time of writing) in a
matter of weeks. That’s a fall of over 30%. On a basic level this means that
shares are trading at lower (and very attractive) valuations - and paying
considerably higher dividends per share.
During January Sales, people are often tempted to purchase items they
perhaps don’t really want or need just because they are cheap! With
investing, ironically, when prices get cheaper most people are overcome
with fear and instead are running for the hills! But would you rather pay
full price for a product or receive a 30% + discount?
“Be greedy when others are fearful”, Warren Buffet.
Another reason it might be considered a good time to invest is that there
is a very high level of fear in the air right now. Last week the FTSE100 had
its worst day since 1987; proof that many investors are in panic mode. The
VIX Index, which measures market volatility, and is also referred to as the
‘fear index’ in financial circles, gives further objective evidence to support
this. At the time of writing the VIX has just jumped to its highest ever
recorded reading of 82.69! This surpassed the previous high of 80.86 in
November 2008.
In the past, being bold enough to invest during periods like this has
generally been extremely rewarding in the long run. For this reason, now
might be an appropriate time to repeat one of Warren Buffet’s favourite
mantras: “Be fearful when others are greedy and greedy when others are
fearful”.
A cautious approach remains sensible
It is important to realise that shares could still get cheaper from here. If the
Coronavirus situation worsens before it gets better, then more falls could
be set to come. However, trying to predict the bottom is also a difficult
game best avoided. Our advice would be to consider drip-feeding into the
market over a period of time. That way if prices fall further, you will still
be able to take advantage of the lower prices on offer. In the long run
stocks and shares are likely to recover just as they have always done from
economic shocks in the past. Those who are willing to invest now, while
fear and uncertainty is high, are likely to be rewarded over future years.
Just make sure you are happy to take the long-term view.
Need Advice?
If you need some advice regarding existing or new investment opportunities
in these uncertain times we find ourselves in, please contact us to arrange a
free initial consultation. This can be done by phone on 0151 236 9973; you
can also email me at: [email protected].
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