A year ago, I genuinely feared for the world I have grown to love over too many decades to remember. Lockdown was on our doorstep and we were stepping into the unknown. Near panic had gripped the nation as coronavirus threatened to swamp the NHS and turn us into hermits.
Retreating to the security of my home to continue working – a first for me after religiously working from an office throughout my career – it seemed as if seismic change was upon us. Stock markets were in freefall and financial Armageddon appeared to be just around the corner.
On March 12 alone, the FTSE 100 Index fell nearly 11 per cent, the second largest one-day correction in its history. It all felt worse than the alarming market plunges of 1987 and 2008.
Wearing my wealth hat, questions bumped around inside my head like the remnants of a hangover. What should investors do? Should they cut their losses and run? Should they hang on to their investments? Should they buy into a falling stock market?
In turning to five financial gurus with a total of 130 years of investment wisdom at work, I found my answers. In a nutshell, they urged investors to keep calm, not crystallise losses and focus on the long term.
How right they have been proven. This time last year, the FTSE AllShare Index was hovering just above 2,800, having fallen like a stone from a high of above 4,250 in mid-January. Although the index dipped a couple of days later at a tad over 2,700, the FTSE All-Share has been in recovery mode, bar the occasional hiccup, ever since.
Today, it stands at 3,834, an increase of 35 per cent on this time last year. Vindication of everything that our gurus told Wealth readers to do.
Below, they give their current thinking on stock markets – caution, rather than calmness, now seems to be the watchword.
It’s not just the UK stock market that has bounced back in spectacular fashion. Those worldwide – the United States and China in particular – have advanced strongly as vaccination programmes have been successfully rolled out and the whiff of economic recovery has become stronger.
Given what has happened to markets in the past year, are there lessons we can learn from our experiences that will enable us to become even better at generating long-term wealth? And, just as importantly, are there things we can do now that maybe we weren’t doing as investors a year ago?
1 HOLD YOUR NERVE WHEN MARKETS ARE FALLING
Financial analyst Laith Khalaf says the pandemic has provided a ‘salutary lesson’ in investors holding their nerve when markets are falling, especially given that the market bounce-back has been ‘quick and substantial’.
To back his message, he says that someone who at the beginning of February last year invested £10,000 in a basket of global equities that tracked the performance of the MSCI World Index would have seen their investment fall in value to £8,000 by the middle of March 2020. This is what it would be worth today if the investor had then let fear get the better of them and cashed in. But if they held their nerve, the £10,000 would now be worth around £11,600 – an increase of 16 per cent.
Jason Hollands, a director of wealth manager Tilney, agrees with Khalaf. He says: ‘Those who hit the panic button and sold their equity investments during the coronavirus crash turned paper losses into real ones and must be kicking themselves now if they’ve seen how well most markets have performed since.’
He adds: ‘Sometimes the best course of action during periods of extreme market turbulence is to sit tight and do nothing.
‘Even rejigging your portfolio when prices are swinging violently can be risky, locking in losses one day and then reinvesting when prices may have lurched higher the next. It’s a little like changing an aircraft engine mid-flight.’
Video: Credit Suisse Warns of Greensill Hit Amid Trading Surge (Bloomberg)
2 BE BRAVE WHEN OTHERS ARE NOT
Stock market corrections can be an excellent time to invest new cash in equities. It means you are buying shares on the cheap.
It’s an approach that requires unshakeable will and can result in sweaty palms, but it’s one that legendary investor Warren Buffett swears by. Some 25 years ago, he said it was wise for investors to be ‘fearful when others are greedy, and greedy when others are fearful’.
In other words, be a contrarian – buy when other investors are running for the hills (as they were early last year) and sell when markets are racing ahead and everyone wants a slice of the action (as they have done in recent months, especially in the United States and China).
Says Hollands: ‘It takes nerves of steel to buy shares when others are panic-selling and prices are sinking. Yet history suggests time and time again that bear markets are great opportunities for those with cash available to invest.’
3 WHY MARKETS DON’T FOLLOW ECONOMICS
When an economy stops growing, or goes into recession as it did in the UK last year, it does not mean the stock market will behave in the same way.
This was evident throughout most of 2020 when equities performed strongly despite a deepening global economic crisis.
‘Investors have to realise that the stock market is not the economy,’ says Adrian Lowcock, a chartered wealth manager at investment fund specialist Willis Owen.
‘The stock market can perform very differently, especially in the short term as it is often driven to extremes by short term emotions and changes in sentiment.’ For example, a change in mood was triggered in early November last year when drugs giant Pfizer announced 90 per cent efficacy for its coronavirus vaccine.
Since then, the UK stock market has advanced by 16 per cent. At the same time, the economy has remained in contraction mode – falling 2.9 per cent in January alone. In other words, investors have profited despite a distressed economic backdrop.
They have benefited from the market anticipating better times around the corner.
4 HOW THE CENTRAL BANKS HAVE HELPED
Tilney’s Jason Hollands says the relationship between stock markets and economies has been distorted by the reaction of central banks worldwide to the pandemic.
From the UK to Europe, United States and Japan, central banks have responded by keeping interest rates low and providing banks with access to cheap funding that they can pass on to business and personal customers. Some of this money has found its way into equity markets, driving prices higher.
Says Hollands: ‘It may seem perverse, but when a crisis provokes central banks into emergency measures, stock markets rather like this. They become addicted to the medicine administered.’
Yet he warns that the flip side could prove equally costly. At some stage, central banks will wind down their support measures. This could cause markets to wobble alarmingly, as they did in June 2013 when the Federal Reserve in the United States (its version of our Bank of England) indicated an end to its recession-busting policy of printing money (quantitative easing).
‘Keep an eye on the Fed over the next year,’ warns Hollands.
5 WHERE CASH FITS INTO THE PICTURE
Just over a year ago, interest rates in the UK stood at 0.75 per cent. But as soon as it became obvious that the economy was heading for lockdown, they were scythed down, to 0.25 per cent and then 0.1 per cent.
The desultory savings rates that have followed have not deterred many households from squirrelling away more money than ever before in a bank or building society. Figures from the Bank of England indicate that between March and November last year, households built £125billion of additional savings as a result of reducing their spending in response to lockdown. More has been saved since.
Jessica Ayres is a chartered financial planner with London-based Timothy James & Partners. She says cash savings play an integral part in successful investing because they relieve the pressure on investors to sell their shares and funds when markets are in freefall.
She adds: ‘A key principle during a market crash is to avoid being a forced seller. A rainy day cash fund, widely recommended to be the equivalent of six months of monthly expenditure, provides the ability to remain invested in the markets and ride out the difficult times.’
AND THEIR ADVICE TODAY…STAY CAUTIOUS
A year on, Wealth’s five financial gurus are all slightly longer in the tooth (in a nice kind of way).
But their current views on the future for equity markets are as compelling as they were in March last year. Rather than urging investors to stay calm, they are now advising them to be cautious.
Sue Noffke, head of UK equities at investment house Schroders, says investors need ‘diversity’ in their portfolios. She believes there are clear signs of ‘market exuberance’ which could result in ‘market setbacks or volatility’. These signs, she says, include the spate of new companies coming to the stock market and retail investors looking to make quick profits from trading shares.
It’s a view shared by the other four experts. Paul Niven, manager of global investment trust F&C, says: ‘Last year saw an extremely narrow market with a small number of stocks driving overall equity market returns. As the year progressed, markets broadened and cheaper stocks which will benefit from economic reopening began to outperform. Looking forward, diversification across different investment styles will mitigate risk of overexposure to any one particular investment theme.’ In other words, don’t put all your eggs in the technology basket.
Andrew Bell, chief executive of global fund Witan, says: ‘Technology had a great 2020, as much of normal life went online. While some of these growth stocks will go on to justify their high valuations, others will go up like a rocket and down like a stick. After the tech fireworks of the past year, selectivity and caution are essential.’
Diversity remains at the heart of Capital Gearing, a £626million investment trust managed by Peter Spiller and designed to preserve investors’ wealth. Its portfolio has 48 per cent of its assets in equities with a 30 per cent stake in index-linked government bonds.
Finally, Alasdair McKinnon, manager of Scottish Investment Trust, believes the recovery for companies whose earnings were depressed by the pandemic – banks, retailers, travel and leisure – is still being underestimated. It is those good businesses in these sectors, he says, that investors should focus on.