COVID-19 market meltdown: why investors shouldn’t panic

“Don’t Panic!” was the famous phrase of Lance Corporal Jones from the 1970s BBC Comedy ‘Dad’s Army’, set in World War II. The past few weeks have certainly given investors plenty of reasons to panic, as the Coronavirus has spread exponentially, and stock markets - reflecting the likelihood of a significant hit to global economic activity over the coming weeks and months - have seen massive declines.

Having had its worse market fall since 1987 last week, the FTSE 100 was down another 4% today (16 March), bringing its collective losses to more than 30% year to date*.

Governments around the world are having to impose emergency powers to deal with the health crisis and we are living in unprecedented times.

But while it is hard to be optimistic when the headlines are so bad, ”Don’t panic” is the message we are giving investors.

Market falls and what to expect

Over the past 50 years we’ve seen 10 market crashes – the first just after Dad’s Army first aired in the late 1960s. The shortest downturn was in 1981, which lasted 42 days. Then, the FTSE All Share fell 21.5%**. The longest downturn was 2000-2003, when the stock market fell some 50.9% over 1,167 days**.

No one knows when falling stock markets will bottom. There is no announcement, no sign – sometimes not even one we can see with hindsight. There was no obvious sign in February 2003, when share prices had halved from their peak during the boom, and there was no obvious sign in March 2009, when share prices had fallen by 46% during the global financial crisis.

All we can say with any degree of certainty is that the stock market will recover over time. But in the meantime, as the economic impact of the coronavirus unfolds, markets will likely continue to experience heightened volatility.

What should investors do now?

For want of repeating myself: “Don’t panic”. Selling investments now would be like shutting the gate after the horse has bolted. All you would be doing is crystallising losses. So, unless you need the money urgently, do nothing, stay invested.

In our own range of VT Chelsea Managed funds we have been trying to act rationally and have been adding to risk assets as markets have continued to fall.

There are other options for investors – especially those wondering what on earth to do with this year’s ISA allowance:

  1. As the ISA allowance is of the ‘use it or lose it’ variety, anyone wary of putting their money into an investment ISA at the moment, could put their allowance into cash and transfer it – or drip feed it – into investments at a later date.
  2. Remember: ISAs can be used on a wide range of investments – not just be invested in the ‘extremes’ of cash or equities. They can be invested in bonds, property, commodities, and so much more.
  3. To achieve some instant diversification, a multi-asset fund may be an option: they can give exposure to different sectors, geographies and assets.

Four multi-asset funds to consider:

VT Seneca Diversified Income: this fund invests in a wide range of assets in addition to the traditional equity and bond markets. Infrastructure and song royalties are just two examples of the sort of assets it holds with different risk and return characteristics.

M&G Episode Income: the name “Episode” refers to those periods of time when investors' emotions cause them to act irrationally – very apt in today’s climate. The manager uses behavioural finance to find pockets of value and invest against the herd, rather than following it.

SVS Church House Tenax Absolute Return Strategies: this fund sits in the targeted absolute return sector, but is a pure multi-asset fund. Its managers place a heavy emphasis on capital preservation, and it is one of the few absolute return funds with a track record which goes back beyond 2008 and the global financial crisis.

VT Chelsea Managed Monthly Income fund: assets will yield differently at different times, so this fund - from our own stable of four - strategically combines diverse sources of income to target a high and resilient yield, year-in, year-out. 

And as for next year’s ISA….

For those thinking ahead to next year’s ISA allowance, to take the worry out of trying to time the stock market, you could invest monthly. This means you benefit from pound cost averaging: more units are purchased when share prices are low and fewer units are bought when share prices are high.

*Source: FE Analytics, total returns in sterling, 1 January 2020 to 16 March 2020
**Source: Refinitiv Data.

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. Darius’s views are his own and do not constitute financial advice.

Published on 17/03/2020