Share investors despise the unknown. In recent weeks, the coronavirus outbreak has been wreaking stock market havoc. There are still many unanswered questions about not only how individuals can stay healthy in the coming weeks, but also what the economic effects of the virus will be.
As a result, markets globally have become volatile and so many darlings of the stock market have started falling like knives. Similarly, year-to-date, the FTSE 100 and FTSE 250 indices are down in double-digits, percentage-wise. Therefore today, I’d like to discuss what I’d do as a long-term investor amid the current noise of the coronavirus uncertainty.
Why I wouldn’t run for the hills
In investing, risk and return go together. In general, share prices are based on investors’ expectations of a company’s future profits. Over the past few weeks, markets have been taking fright as they wonder how travel, retail sales including luxury goods, supply chains (especially those dependent mainly on China), and manufacturing may be affected.
As we begin to get warnings from analysts or trading updates from companies themselves, markets are seeing many share prices fall fast. Some investors tend to react to such updates first and ask questions later.
Whenever markets decline considerably in a matter of weeks, many investors wonder if they should sell and accept the paper losses. Each portfolio is unique and different investors have different risk/return profiles.
However, history tells us that markets tend to recover from losses, only to make new highs. Yet timing the market is extremely difficult, especially for the average investor.
Personally, I’m a long-term investor. My investing horizon is years. Therefore I’m determined to not get caught up in the panic.
Warren Buffett’s wisdom
As many of our readers would know, Warren Buffett is regarded as one of the best investment managers in the world. He has recently repeated his long-held view that stocks tend to outperform other asset classes in low-interest-rate environments.
But he also admits that neither he nor anyone else could know what direction the economy or shares will take in the future. Yet he doesn’t think there’s any need for worry for the individual who doesn’t use borrowed money and who can control his or her emotions.
To him, if you’re not thinking of owning the stock you’ve just bought for at least 10 years, don’t even think of owning it for 10 minutes.
As he takes a long-term approach, falling prices don’t make him nervous because he has seen equity markets recover time after time. Instead he sits tight and patiently waits.
What else can the average investor do?
In the short run, I’m expecting continued volatility in stock markets as well as in the value of the pound and prices of most commodities.
Not only when we have uncertainty in the markets, but in general, I’d regularly review my portfolio with an eye to diversifying. Diversification, either by sector or geography, may provide a relatively defensive investment opportunity.
Our readers may also consider buying a FTSE 100 tracker fund or the FTSE All-World ETF that tracks the performance of a large number of stocks worldwide.
On a final note, this market crash has boosted dividend yields of many FTSE 100 shares to over 6%. And this annual payout would be on top of any potential long-term returns from the share prices themselves.
