As people all over the world contend with the increasing impact of the coronavirus on our day-to-day lives, we want to assure all of our clients that Justwealth is well prepared to continue operating as usual, without disruption. One of the benefits of being an online company is that our principal means of communication with clients and business partners – phone, email, online chat – do not pose a risk to spreading coronavirus and are unlikely to be interrupted. We encourage clients to continue to contact us if you have questions or concerns and we will respond to your requests in a timely manner.
Since our last market update two weeks ago, volatility in the financial markets has increased. Abnormally high one-day losses and gains have been happening across the globe. As of mid-March, North American equity markets were down roughly 20% from their recent peak, which is the threshold to declare a “Bear” market. Comparisons have been made to market declines pertaining to the financial crisis of the late 2000’s and Black Monday in 1987. While the merit of these comparisons is debatable, the sense of panic among investors – then and now – is highly evident.
As investment professionals and fiduciaries trusted to look out for your best interest, it would be irresponsible for us to panic. Instead, we offer you advice and guidance that is based on facts and logical decision making, not emotion. Following are some important points that we consider to be critical to forming a basis for our advice:
- In aggregate, the incidence rates of coronavirus are still increasing; however, in China, where the coronavirus was believed to have originated, incidence rates are decreasing.
- Governments and businesses around the world have enacted measures to control the spread of the coronavirus.
- Central banks have aggressively adopted accommodative measures in order to help limit the expected decline in economic activity.
- The amount of time to recover to previous market highs from some of the worst stock market declines (health or non-health related) can vary from several months to several years. The recovery rates for Canadian and U.S. equity markets is 100%.
- A stock market is generally believed to be a leading indicator, meaning that current prices reflect future expected events. The recent sharp decline validates that a lot of negative future financial results have already been accounted for.
- Buying after a market decline will result in improved returns compared to not buying in the event that prices eventually recover to previous highs.
- Selling after a market decline will result in decreased returns compared to not selling in the event that prices eventually recover to previous highs.
- It is widely believed in academic research that market timing does not work.
Ultimately, time is your best friend in investing. In the long run, the impact of short-term events will be diminished, potentially to the point of being considered irrelevant. Market declines are normal. The timing is unpredictable, but they will inevitably happen and knowing how best to respond to them can improve your expected outcome.
We have been very consistent with our advice recently. If you have the luxury of a mid to long-term time horizon (i.e. you do not need to access a significant amount of your assets within the next few years), and there have otherwise been no material changes to your financial condition:
- We do not recommend redeeming/shifting equity investments to cash.
- We do not recommend shifting assets to a more conservative portfolio.
- We do not recommend stopping regular contributions if they were previously planned.
- We do not recommend any “temporary” investment strategies.
For those investors who have the financial flexibility and the willingness to invest additional assets:
- We recommend making additional investments at prices substantially below previous highs.
- We recommend a systematic, staged approach to investing for larger lump sum contributions.
- We do not recommend investing in a more aggressive portfolio than you were previously using.
If you are wondering if Justwealth will be making changes to any of its portfolios in light of the recent market events, the answer is “likely”, but they will be based on future long-term expectations, which tend to change gradually and infrequently. The magnitude of the recent events may increase the frequency of how often we will revisit our portfolio construction assumptions, but it will not change our approach. We will continue to build and recommend portfolios that we believe will give investors the highest probability of meeting their investment objectives given their risk constraints.
The Justwealth Team