The five most powerful virtues to help investors in a crisis
Posted by Adrian Lowcock in Portfolio management category on 25 Mar 20
Crises are always different, they have a different effect on the economy and indeed stockmarkets. It is because of this that we often feel like this time is different to previous crisis. Of course, there is a huge difference between the Global Financial Crisis and the Coronavirus (COVID-19) crisis. However, whilst the trigger is very different, the result is often very similar - fear and panic.
The question is what can you do about it. We cannot control some things in our lives at the moment but we can control how we behave as investors and we have some powerful tools to help us do so.
Time is often seen as an investors’ most powerful ally. The more time you have the better, if you don’t need the money now and can wait a few years then your investments have more time to recover. Just as “time heals all wounds” it also can help recover any unrealised losses you might have in your portfolio. Market falls just as we are seeing today are part and parcel of investing, but in time, markets have tended to recover.
Great investors need patience and to be able to resist the urge to do something. In times of crisis many investors panic. They succumb to their fears and decide to act on their emotions. It takes a lot to resist this, especially as the evidence all points to things getting worse before they get better. But if you have patience you can avoid selling at the worst possible moment and realising your losses.
It is human nature to focus on what is immediately in front of us and to over-emphasise its importance. Of course, the coronavirus (COVID-19) crisis is significant and should not be underestimated. However, the threat is expected to pass, companies to survive, the economy to begin to recover and people to adjust. The ability of people and companies to adapt is often underestimated.
It is more important than ever to stick to your investment principles and to follow your investment selection process. Whilst these should be reviewed and tweaked if they can be improved it is not a good idea to abandon your process in stressful times. The best fund managers lean even harder on their process and it is this that will see them and their investors through the crisis.
Once you have made your choices and investment decisions and have set your plan in motion, the best thing you can do is switch-off. You cannot control the markets and watching them swing so violently is only likely to cause knee-jerk reactions and could lead you to make bad decisions.