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Gimme shelter

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I’m ‘lucky’ enough to have lived through several stock market corrections and a couple of bear markets.

So I already know that it can feel like the world is ending when FTSE 100 falls more than 10% in a day and the US market drops so fast it triggers circuit breakers to halt trading.
 
But I also have muscle memory to remind me that it’s felt like this before and we got through it.
 
That doesn’t necessarily make seeing many years of savings eviscerated in a fortnight any easier.
 
But anything that doesn’t kill you can make you stronger – that was how the German iconoclast and philosopher Nietzsche put it.
 
Admittedly he was on his way to a lunatic asylum, as they called them in those days, but anyway my experience tells me it’s possible – probable – we’ll soon get through this, too.

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De-FANGed

How and when will this sell-off reach its climax?
 
I have no idea. Nobody does.
 
It may be we’ve seen the bottom by the time you read this, similar to the falls of 1987.
 
Alternatively the slump may drag on for years, like it did in the early 2000s and the 1970s – though not even I’m old enough to remember that one!
 
It’s easy enough to speculate. But I believe it’s impossible to know for sure.
 
It’s because it’s so hard to predict how markets will move in the short- to medium-term that experts advise us to invest in a range of asset classes.
 
This strategy can feel like folly when your racy growth stocks are soaring, say, and yet you’ve also got money in duller dividend shares, bonds, cash, REITs, gold, or any of the myriad other investments you can make with the click of a button nowadays.
 
That’s been especially the case for the past few years. US large cap tech stocks like Amazon and Facebook have led the market higher year after year.
 
But recent weeks have proven the advice to diversify is timeless for a reason.

Everything must go!

Early on in the corona-crisis, only Chinese and Asian bourses cratered.
 
Somewhat strangely Western markets climbed higher. The US hit new highs.
 
But that was then, this is now.
 
After the fastest crash into a bear market in the US in history and huge falls in the UK and across Europe, the pandemic-scare has been revealed as the global crisis that it probably always was.
 
Early on the falls seemed controlled – and it was possible to find shares that had been untouched by the selling. But in the past couple of weeks investors have been dumping everything. Quality, growth, large and small caps, emerging markets, private equity funds, and nearly all other shares have been bunged overboard like rotten fish.
 
Perhaps someday the market will be seen to have overreacted. Time will tell.

If that proves to be the case then this crash will eventually be just another of those wobbles on the long-term graphs of compounded returns that we all love to look at.
 
But right now most of us would love to see some green in our portfolios to curb the savage declines, even at the cost of lower long-term returns.
 
And there’s been precious few ways to get them.
 
As I said, supposedly safer dividend-paying stocks – or ‘bond proxies’ as they were misleadingly called – have been dumped.
 
With that said, corporate bonds have sold-off too, as investors have begun to fret about companies defaulting on their debts. They haven’t fallen as fast as shares, but they’ve hardly been a safe haven!
 
REITs have been abandoned faster than motels infested with cockroaches and rats.
 
Infrastructure and alternative energy trusts held the line for a time, but then dived.

And after initially rallying, gold too has seen days of frantic selling and price declines.
 
As for Bitcoin – the ‘new gold’ has seen its price plummet even faster than shares.

A license to thrill

No, aside from cash – king of the asset classes at brutal times like this – only one asset class has been there to comfort investors during this crisis.
 
That’s high-quality government bond funds – which for most Fools means gilts issued by the UK government, and perhaps also US Treasuries.
 
The iShares Core UK Gilt ETF for instance is up 8% year-to-date, compared to a UK market that has fallen by more than a third since New Year’s Day.
 
If you’ve even wondered what a lifebelt looks like in a market storm, now you know!
 
What’s notable is UK and US government bonds have delivered these strong offsetting returns even after years of demand pushed prices up and yields to all-time lows.
 
Many pundits speculated that government bonds had lost their ability to rise to offset an equity crash because prices were already so high.
 
But the past few weeks chucked that theory out of the window.

Learn this lesson

This is not a call to swap your beaten-up shares for government bonds.
 
Perhaps the crash has further to go, but we’ve already seen massive losses in shares and gains in government bonds. This could be a terrible time to make that trade.
 
However in the long-term, I’d suggest you make a note of how you feel right now when you look at your portfolio of shares awash in red.
 
Someday stock markets should recover. Eventually we’ll see another bull market again, though whether in a year or a decade I cannot say.

But when we do we’ll be tempted to put all our money in shares again.
 
At that point you can then look at your note, written in the depths of the sell-off of early 2020, and remind yourself that this is why you’re diversified…

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Owain Bennallack owns shares in Amazon.

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