COVID-19: An update on investments

Insights 01.04.2020 Author: Chris Clayton

“There are decades where nothing happens and there are weeks where decades happen” Vladimir Lenin

In our last update, we talked about the importance of keeping nerve in financial markets and investments and how the best periods of growth tend to follow the biggest falls. It was interesting to note, therefore, that last week we saw the largest US market rally since 1931 with the Dow Jones Index posting a 20% gain. We are not in any way suggesting that the crisis is over because this index still remains down over 20% for the year, but it does demonstrate the dangers of crystallising losses through volatile periods. There is little doubt that we will see continued volatility for as long as we all have unanswered questions about the Coronavirus but the fund managers we are speaking to appear surprisingly calm and controlled, reflecting a mood that seems to have engulfed the nation.

On a positive note, the US Congress finally agreed a $2.2 trillion dollar package to shore up the US economy. At almost 10% of GDP, this is a staggering number and reflects not only Congress’s acceptance of the seriousness of the situation but also the world’s determination to provide an almost unlimited economic crutch to support the planet’s economies thereby providing the best chance of returning to some sort of normality once the pandemic is finally under control. This does, of course, exclude President Alexander Lukashenko who remains firmly of the belief that Belarus’s survival lays in the hands of vodka and saunas! It’s also probably not a surprise that North Korea have no reported cases of COVID-19.

In other positives, the potential flattening of UK case numbers, increase in virus testing and the likelihood of an antibody test any day soon, gives us a glimmer of light at the end of the tunnel. Of particular interest is the Mercedes Formula One team and University College Hospital clinicians working together to produce a compact breathing aid. This, it is hoped, will help keep coronavirus patients out of intensive care. If trials go well, a potential production of 1,000 devices a day could be a welcome game-changer. We are now hearing that more F1 teams are collaborating to see what they can bring to the fight. It demonstrates just how cutting edge the sport’s engineering capability, knowledge and speed to market is and having facilitated clients investing in Enterprise Investment Scheme (EIS) opportunities with an F1 team, we have seen many similar examples of these partnerships delivering real benefit to people’s everyday lives.

There is no doubt that the last week has seen the country do what it does best in times of adversity, roll it’s sleeves up and come together for the greater good. The reality is however that this has come off the back of a number of previous emotions that we have no doubt all gone through. Anxiety, denial, fear and panic. These are things that most of us have to experience before we finally find acceptance and then start on the journey of hope and optimism. It is usually at this point that we start to make our most sensible decisions.

The Government’s daily briefings are attracting audiences of over 25 million, which is not far short of the 1966 World Cup Final and the funeral of Princess Diana. These broadcasts have drip-fed us news over a period of time and this has allowed us to travel the emotional mood curve together. This mood curve applies to nearly all aspects of our life, not least how we deal with money. Time and time again we see swathes of people running to invest in the ‘next best thing’ but in reality this tends to happen at a time when that particular thing is at or near its peak. Equally, emotion tells us to sell when things are going badly but again this is usually only after it is too late.

The reality is that for the best investments outcome investors should be doing the complete opposite, i.e. buy when things are doing badly and sell when they do well. Unfortunately, the human psyche stops most of us from doing that. That’s why we outsource our investments to experienced and skilled professionals who employ sophisticated models and exercise significant investment discipline and diversity to avoid this behavioural flaw. It explains why these managers may sometimes appear behind the curve compared to that mate we all have in the pub who is ‘smashing the markets’. This is very much by design and we believe the sensible way to invest long-term money. The one thing we do know is there are no crystal balls and no one can accurately predict the future. It is therefore a disciplined process that will likely give the best outcome over time, even though things may appear counter-intuitive at times.

This whole psychology of ‘behavioural finance’ is fascinating and before the COVID-19 outbreak we were looking to put on a general investments seminar to include a section on this very topic. This remains firmly on the agenda and may be of even more relevance given what we are all experiencing now.

What next?

If you have any questions regarding your investments, please contact a member of our financial planning team.

Please click here for our dedicated COVID-19 page. Here you will find information on a range of subjects from all our departments, including the Governments financial packages and help for both employers and employees.