by Ian Campbell
Director & Chartered Financial Planner
As the UK remains in lockdown as part of the government's bid to flatten the coronavirus curve, the pandemic looks set to maintain its hold on all our lives for the foreseeable future.
At the time of writing, the number of confirmed cases worldwide stands at over 800,000, with around 40,000 reported deaths, including 60 in Scotland. The virus is affecting six of the world’s continents – only Antarctica is so far untouched – and world stock markets continue to feel its effects.
In March, the value of the FTSE 100 fell by around 15%. Other global stock markets have seen similar falls.
Coronavirus and the stock market have combined to create short-term volatility. But what impact – if any – does that have on your long-term financial goals?
Keep calm and carry on
The important thing to remember is that investment is a long-term strategy.
International trade wars, the Brexit vote, and national elections have all had a recent short-term impact and the current threat of coronavirus is no different.
Keeping your head when the market dips, avoiding emotional knee-jerk reactions, and drowning out the noise is crucial. If your long-term goals haven’t changed, then your financial plan and investment strategies don’t need to either.
This is where your AAB Wealth adviser, and our professional knowledge of the markets, can help.
Over the last 25 years, the FTSE 100 has experienced many downturns and yet IG confirms a compound annual return over that time of 6.4% with dividends reinvested: a total return of 375%.
Looking at the last 35 years, we can see the generally upward trend of the index, albeit with the occasional period of short-term volatility.
FTSE 100 Index since 1984:
Let the markets do the work
Markets are efficient and based on all available information at any given time. At AAB Wealth, our investments are evidence-based, highly diversified and intended as strategies for the long term. We also believe in keeping costs low.
A key role of any adviser is to help you maintain discipline when times are tough. We can help you avoid those snap decisions and behavioural traps that investors can fall into and we’ll do that by reminding you of three things:
1. Market downturns tend to be short, sharp shocks
In the context of long-term investment even a sustained period of unrest, such as the 2008 financial crisis, becomes a momentary trough if we look at market performance over the longer term.
Periods of short-term volatility should be expected as prices will fluctuate daily, however, in the long term, markets tend to offer positive returns.
2. Learn to ignore the noise
We’re currently in a period of great uncertainty and it’s hard to say for how long the current restrictions on our lives will continue. Its short-term effect on the stock market has been clear.
When we talk about ‘noise’ we generally refer to local or national politics, or the future of the UK high street. This time, we’re discussing a genuine threat to life, but the stock market will react in the same way.
Over the next few months, we’ll be using our expert knowledge of the markets to help our clients drown out the noise, keeping them on track towards their long-term goals.
3. Have confidence and wait it out
In difficult times, you might feel rushed into making snap decisions. It’s important to remember that a low-cost, diversified portfolio is designed to ride short-term volatility, however unprecedented its cause.
This graph shows the hypothetical growth of $10,000 invested in the US S&P 500 Index between January 1, 1980, and December 31, 2018. It shows the impact of knee-jerk reactions and the money lost if you had pulled your money out, even for a short amount of time.
An emotional response to a sudden, short-term dip could significantly reduce your potential long-term growth – even missing the five best return-days over the entire length of the investment could reduce returns by $232,550. Missing the best 50 days would see you miss out on $602,203 of potential growth.
Past performance is no guarantee of future success, but the evidence suggests that over the long term the markets offer positive returns. A good adviser will be there with you for the whole of that journey, long after the current crisis is over.
Speak to your adviser
If you have any questions about the impact of coronavirus on your finances or your long-term plan, please get in touch with your usual AAB Wealth contact.