As the spread of the virus continues, countries have restricted the movement of people across borders and have implemented social distancing measures. This has resulted in major disruptions to economic activity across the world which is likely to remain for some time as efforts continue to contain the virus.
The severe economic disruption and uncertainty caused by the coronavirus has resulted in high levels of financial
market volatility. Equity prices have experienced large declines and the Australian dollar has fallen sharply. Government bond yields have also declined to historic lows and there have been significant liquidity issues in global bond markets.
However, it’s important to remember that when investing, it’s the long-term results that matter. Capital values are going to fluctuate over shorter-term periods. The vast majority of large companies which people own in their share portfolios are likely to get through this difficult period and recover to a huge extent.
As a result, the share prices of these companies should, in time, retrace their falls. Hence, it is highly likely that this current circumstance is a transitory period of volatility and not the end of the world.
Believe it or not, big falls of 30% to 50% are actually not that uncommon in share markets. If you look at the following table you can see the history of the US share market, which is the world’s largest share market.
Since 1968, the US share market has had 7 periods (including this one) where there have been large falls. In 2000 and 2007, the share market lost almost half its value! We note, however, that each time it has more than fully recovered, delivering excellent returns for investors. Long- term returns to share markets have historically been in the 7% to 9% per annum range for most markets around the world. That is better than any other type of investment.
However, these great returns come at the price of bouts of volatility every 10 or so years.
There will always be risks, recessions, and crises of different types. As investors, we need to accept that some volatility is inevitable. To earn good returns over time, we should invest in well-constructed and diversified portfolios even if this means experiencing short-term volatility from time to time. While economic pain cannot be avoided in the near term, there are plenty of tools available to fight the economic slowdown in the longer term. It’s important to remember that financial markets have been through all sorts of crises and this is one from which the economy will eventually emerge.
For further information on your investments, please contact your financial adviser on P: 08 8268 5160
