While the impending spread of COVID-19 is concerning from a human perspective, those with investments may start to worry about its effect on the market.
Despite the recent excellent performance of markets globally, the potential COVID-19 pandemic means we’re going to see market volatility. As China’s economy starts to feel the impacts, global trade—relying so much on Chinese production—will in turn experience a downturn. This is a given.
Should we be concerned over a sharp decline in the market?
The short answer is no.
Markets, by their nature, are designed to handle this type of uncertainty. As an investor, this can be distressing—but it’s not rock bottom. While the market faces a sharp decline, this means it’s functioning as we expect it to. This is an indicator that the market is responding to this new challenge.
We would actually be more concerned if the market continued to increase.
Markets fall during these times, there’s no denying it. But they bounce back. And with a long-term investment strategy in place, you can take comfort that your funds are protected.
How we protect your investments
Two of our central investment tenets are particularly relevant in times like these. The first is about having a market-aware, or diverse, approach to investment. The second is that risk is rewarded over the long term.
Building a market aware portfolio
The COVID-19 pandemic is having an impact on many industries globally, some more than others—airlines, for example, as travel bans take effect.
Building a market aware portfolio is about diversifying across regions and across industries. Taking a market aware approach, and not over-weighting your investments into any one industry or region, means that impacts on one specific industry will be absorbed by your investments in others. You’re protecting your capital from region- and industry-specific failure. Your portfolio is diversified, stress-tested, and built to withstand these exogenous shocks.
Risk will be rewarded
If we look at global pandemics in the past, we can see that there have been drops in the market before. But the market always recovers, which is why taking a long-term view is the safest option.
By panicking, trying to predict when the market will bottom, and trying to sell out, you have the potential to damage your investments. By staying on track, accepting this risk, and focusing on the bigger picture, you’ll see better long-term performance.
Because as risk increases during times of volatility and uncertainty, so do your potential future returns. While prices may be pushed down, there’s the expectation that the risk investors are shouldering today will be compensated by positive returns in the future.
 Hutt, R. (2020). The economic effects of COVID-19 around the world. Retrieved from https://www.weforum.org/agenda/2020/02/coronavirus-economic-effects-global-economy-trade-travel/
Is your portfolio is built to handle risk?
Think of the current market volatility like turbulence on a plane. It’s unpleasant at the time, but you will get through it on the proviso you have a market-aware, diversified investment strategy which will enable you to stay the course and ride out the market turbulence.
So, for the impending COVID-19 pandemic, things are likely to get bumpy. But on the basis that your investment philosophy is sound and you just stay in your seat, keep your seatbelt on, and remain calm, you’ll arrive on time at your destination.
Director, Stephan Independent Advisory
Joe Stephan graduated in 2002 with a Bachelor of Business (Fin Plan) under the tutelage of his father (Program Leader of Financial Planning at RMIT University).
You will hear Joe bandy about the idea of “pure financial advice”, which is given objectively and focused around the needs of individual and not the internal needs of the business providing advice.
Joe is realising his vision every day through his Independent Advice Firm which he owns and operates with his brother James. Joe also spends a portion of his time teaching tomorrow’s Financial Planners at various Melbourne Universities including RMIT & LA Trobe.