Lessons learned from a crisis

It’s the 19th March 2020. A month ago stock markets had barely noticed the Coronavirus. Now they are in a panic. The world is going into lockdown. The FTSE 100, which had a month earlier been trading at 7,500, is now below 5,000.

Now working from home, I look at my computer screen, which shows the share prices of companies. It is a sea of deep red as they have all fallen. Even a previously boring debt trust, which is almost entirely backed by government revenues, has collapsed. For all the studying, reading and past experience, nothing can fully prepare you for anything like this. At least in 2008 in the global financial crisis, we were in an office with our colleagues.

Friends and family with various different investment funds call me throughout the day. They are horrified by their losses. They all ask the same question: shouldn’t they sell now and buy back in when the market is lower? If only it were that easy. No one knows what the market will do next. If they sell now, they will definitely crystallise losses and could miss out if the market rallies.

Thankfully, most Chelsea clients are already aware of this and their discipline is admirable. Very few have hit the panic button and decided to sell out. As it happened, the market bottomed over the next few days. Those who held their nerve were quickly rewarded as the market bounced very quickly. The extraordinary anomalies and prices were gone in a few days.

So what did we learn from this crisis?

Lesson 1 – Market falls happen

Market falls will happen and on a fairly regular basis. So we need to expect falls and understand they are a necessary part of investing. If you are uncomfortable with this sort of loss you should not have your whole portfolio in equities. Look to reduce risk by adding in bonds and low risk absolute return funds, or simply hold more cash. As a general rule you don’t want to panic out of your investments after the markets have already fallen heavily. If you find yourself in this situation your investment strategy was probably wrong to begin with.

Lesson 2 – Don’t expect diversification to save you

Diversification is very important. You never want to have all your eggs in one basket. You always want a broad mix. Imagine if you’d had all your money in the shares of one airline or restaurant stock going into the Coronavirus - it would have been a disaster.

But don’t expect diversification to save you either. In a true crisis like this one, everything falls together (although some things will fall less). Why is this? Because investors need to raise cash, so they sell whatever they can. This is why even traditional safe havens such as gold actually decreased in value temporarily at the height of the crisis in March. Even US government bonds (which did very well initially) began to sell-off at the very peak of the pandemic. Then the central banks stepped in and restored order.

Know that at some point, your investments - no matter how good they are - will go down and it will be painful. Expect this and plan for it. Also understand that this can provide opportunities, as even good investments fall with everything else. Take online tech companies like Amazon, Microsoft and Netflix, for example. All fell heavily at the start of the crisis, despite their businesses actually benefiting as we were all forced to stay at home.

Lesson 3 – Markets can bounce back quickly

By early April stock markets were starting to bounce back. But very few people had faith it would last. After all, the economic data was terrible: tens of millions were unemployed, businesses everywhere were going bust and a vaccine or treatment was still a long way away.

Yet here we are now in August only a few months later. The NASDAQ is at an all-time high, up almost 50% from the bottom in March. This, despite the fact the USA is still recording huge daily numbers of Coronavirus cases. The lesson here is that markets can bounce back very quickly, and it can be easy to get left behind. It can also be very dangerous to time markets.

Four funds to consider

Constructing your own investment portfolio can be a bit daunting. For those investors who’d prefer a professional to make the choices for them and to change the asset allocation when need be, here are some options. All can have between 20% - 60% invested in shares and aim to produce an income.

Artemis Monthly Distribution – this fund invests in both bonds and equities from around the world in pursuit of an attractive monthly income, as well as capital growth. The ratio between bonds and equities will be varied to suit market conditions. The historic yield is 3.74%* and the fund has returned -5.94%** year to date. To put this into context, the FTSE All Share is down 16.87%** year to date.

Jupiter Merlin Income – this multi-manager fund has been designed to provide an immediate and growing income, with the potential for capital growth too. The team analyses the macroeconomic environment and then identifies fund managers most likely to perform in that environment. The fund has an historic yield of 2.7%^ and is down just 0.36%** year to date.

M&G Episode Income - this multi asset fund invests directly in individual stocks and bonds, while property exposure is gained by investing in property funds. The manager uses behavioural finance to find pockets of value and invest against the herd, rather than following it. The fund has an historic yield of 2.45%* and has returned -8.06% year to date.

VT Chelsea Managed Monthly Income - the investment advisors to this multi-manager fund are the members of Chelsea’s own research team. Investing in all different types of assets, the fund aims to pay roughly the same amount of income each month so that you can budget with confidence and the team has been working hard to keep the dividend as stable as possible. The fund’s historic yield is 4.73%^^ and it has returned -3.52% year to date.

*Source: FE Analytics, total returns in sterling, 1 January to 17 August 2020
**Source: Fund factsheet, 31 July 2020
^Source: Fund factsheet, 30 June 2020
^^Source: Fund factsheet, 31 May 2020

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. James's views are his own and do not constitute financial advice.


Published on 18/08/2020