How to invest during COVID-19 market mayhem

As I write this article the JSE is down around 35% since the Covid-19 virus has emerged. This is a market crash and a rapid one at that. Even in a well diversified portfolio that has followed all the rules, an investor will still be feeling the effects of this very turbulent market. The big question is what should we be doing as we try to not only preserve wealth but build wealth in these uncertain times?

The best advice any financial advisor could give you right now would be to do very little. Especially if your response is caused by fear. When we look at the history books we see that equities will beat inflation in the long term, even with market crashes and economic recessions. Bear in mind that the stock market is only risky in the short term, so if you are a long term investor your biggest risk would be to try and time the market at this stage.

Most investors know what the ideal response to a turbulent market is until their net worth is suddenly cut by a quarter. This is pretty unnerving, and what makes it worse is that we might not be at the bottom of the crash as yet. Our first recommendation in dealing with this reality is: stay calm, be practical and stay positive. You will be a much happier person for it. The anxiety of trying to figure out what you should be doing with your investment at this stage is not conducive to a happy life. If you are still building wealth (not yet drawing from your investments) you should try to increase your debit orders into your investments, these most likely being retirement annuities, tax free investment or discretionary investments such as unit trusts and etfs. Doing this is called “rand cost averaging”, where you buy more units through the dip of the market. Here an investor would be buying at a really low point which makes growth a lot more likely and dividend yields a lot higher. On this point we are in a really exciting time for wealth creation.

If you are drawing from your investments each month, it would be a good idea to look at your budget and see if you can reduce your monthly withdrawals while the market is so depressed. This will give your investment a longer life span as you will not be selling units that are undervalued. The South African stock market historically has taken around two and a half years to recover and if you can reduce your income for that amount of time it will have a positive effect on an investment’s life span.

Stock prices are currently oversold (dirt cheap), which does not mean that they can't go any lower. The need to be practical is important. Viewing the market by valuation only would make one tempted to go “all in” as it seems to be a good time to buy. However we must look at the earning potential of a company or country and the time it might take for markets to recover. At this point we must make sure that we stick to the basics of what makes a solid investment plan and do not let greed or fear cloud your judgement. When the Corona virus is no longer a crisis and people understand the situation better and realise that this is not the end of the world, the markets will recover and investors will get their value back. Europe and the USA have started to input enormous stimulus to keep their economies from entering into a recession. This tends to have a positive effect on economies and markets globally. The Covid-19 virus will no doubt have an impact on businesses around the world. The economic shock will be felt in supply and demand channels as well as in low consumer confidence going forward. However if we want to take part in the recovery of this market we need to stay invested and wait for the catalyst that will cause markets to return to a bull market.

Now is the time to stick to your guns. If your investment is well diversified across asset classes, geographies and industries you are in the right place. Do not jump ship in a storm. Being patient and sticking to your investment plan is the most successful and consistent strategy that has worked throughout every market crash in the past.

David Wisdom

Financial planner at Wisdom Asset Management