The financial markets and the face mask perspective

Published on

Face masks are a hot topic at the moment.  Some medics and scientists say there is clear evidence they reduce transmission of Covid-19, while critics argue they are ineffective and instil fear in the community. Everyone has an opinion. For our part, we can be flexible in our offices and, as well as social distancing and other measures we have put in for everyone, we are happy to wear face masks in meetings, which some of our clients prefer. Other clients are more relaxed about it. It’s all a matter of perspective.

As it is with financial advice. At the start of the pandemic the stock markets started to fall and kept on falling until the 29th March. Most advisers and commentators, including us, were saying “stay invested, don’t panic”. The reason for that was markets always fall. They are not risk free, but they usually recover. If you sell after the fall, you miss out on the recovery, thereby locking in your losses. What’s more, in a well-diversified portfolio, you shouldn’t fall by as much as the markets, so when you recover, you start from a higher base, thus feeding long-term gains.

A diversified portfolio can benefit most investors, regardless of the amount of funds you have. It is where your investment is spread across a broader base. This can include a mix of asset classes (such as stocks and shares, property funds, bonds, cash), varied geographical areas and different types of funds or fund managers.

But what if you can’t wait for the recovery? What if you need the funds in the short term? This is where perspective comes into it. There is no right or wrong answer, but as a general rule, if you don’t need the funds for five years or more then stay invested. If you need the funds within a short period of time, perhaps because you are coming up to retirement or ready to buy that house, then you should consider moving into cash, even if that means selling while the markets are still low. That’s because we can’t predict what will happen next. We have seen a strong recovery since the end of march, and we expect that to continue, but if there is a second spike of COVID and another national lockdown, markets will almost certainly fall again. If you don’t have time to wait for the next recovery, then why take the risk?

Your timescale changes your perspective. The shorter your timeline to needing the funds, the less risk you should take.

Craig Davidson
Managing Director

Copyright © Davidsons IFA Limited 2020