Global share markets remain quite resilient despite growing tension over a second coronavirus wave. Things can change in a blink of an eye though, as late February’s sell-off illustrated perfectly. The chances of another stock market crash remain considerable.
UK share indices have rallied in recent weeks following the gradual easing of lockdown measures across the globe. The FTSE 100, for example, is up around 1,300 points from the multi-year troughs hit during the worst of the recent market crash. However, recent news flow on the spread of Covid-19 suggests the phased unwinding of quarantine measures could be knocked on the head.
In Germany, the coronavirus reproduction rate climbed back over the critical 1 marker over the weekend. It’s led to speculation that quarantine easing has been both too soon and too extensive. Beijing is battling a second wave of the virus after earlier being designated ‘Covid-19 free’.
Infection rates in many US states continue to balloon too, with California on Sunday recording its biggest spike in one-day cases since the crisis began. Do all roads seem to be leading to another stock market crash then?
Low risk, bad return
The total social, economic and geopolitical costs of Covid-19 remain unknown. They’re likely to be feverishly speculated on for months (and probably years) to come. What has already become clear is that the consequences on all three of these fronts threaten to be considerable.
So what’s the average share investor to do in this environment? Would they be better served by locking their money up in lower-risk investments like cash accounts or bonds?
On the plus side, assets like these provide a guaranteed return. They also, of course, remove the stress that short-term financial market volatility creates. But, on the other hand, investors can expect to make only some truly-pathetic returns on their cash here.
Research shows the best-paying Cash ISA on the market offers a rate of 1.1%. Over the space of, say, 20 years, someone who invested £300 a month would have made just £80,400 on their money. Compare that to the £170,700-£215,500 which someone owing a Stocks & Shares ISA could be expected to make over the same timeframe.
Don’t fear another stock market crash
This is based on studies showing how long-term share investors can make returns of 8-10% on their money. It’s a calculation which is particularly important to remember right now.
Why? Well it underlines how the key to successful investing isn’t to worry about temporary share price turbulence. The most successful investors buy shares and hold them for many years, possible decades. Locking your chequebook up, or selling your stocks whenever a major economic or political event occurs, can set you back considerably.
Remember that volatility on financial markets is nothing new. The coronavirus crisis is a new problem for economists and politicians to battle. But history has shown the most successful investors continue to buy stocks in bad times as well as the good.
It’s why I plan to continue buying shares for my ISA, despite the prospect of another stock market crash.
