‘Buy during a panic, don’t sell’
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Financial expert Peter Sharkey on why you should think carefully before pressing the ‘sell’ button...
The headline advice above, probably contrary to anything you've read or heard recently, comes from David Dreman, a retired Canadian money manager and author of Contrarian Investment Strategies, published in 1998, which discharges several similarly succinct investment rules to follow during political and financial crises.
In a chapter headed Crisis Investing, Mr Dreman notes that the standard reaction to crises rarely changes: 'The advice given by experts over time has almost always been a knee-jerk recommendation to sell,' he says.
We've become so conditioned to reacting negatively to crises that many people believe this is the correct course of action: sell everything and head for the hills, or perhaps that should be sell and self-isolate. Such reactions are hardly surprising given what can pass for objective reporting and often wildly misleading headlines which, Mr Dreman, believes, 'are reinforced by expert and peer opinion that things must get worse.'
Yet anyone contemplating a similar course of action may first wish to consider the following extracts from last week's Sunday Times and Investors Chronicle.
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The ST announced that 'Investors spooked by the coronavirus epidemic pulled a record £1.55 billion from [collective] funds in the final week of February as the stock market tumbled by 11.1%….[which] made February the worst month [for selling] since October 2016.'
However, a couple of days earlier, Investors Chronicle reported that: 'Seven out of the ten best-performing [collective] funds in February were Chinese equities.'
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The magazine said that the best-performing fund produced a return of 12.6% in the space of a single month , while the second- and third-best collective funds (each invested in China), returned 6.8% and 6.1% respectively. Remember, the returns are calculated over the course of 30 days, not a year.
Adding support to Mr Dreman's contrarian advice is the fact that Chinese-facing collective funds were among the worst performers in January. This may come as a surprise, although while domestic panic-buying was emptying supermarket shelves of loo roll and tinned beans, the World Health Organisation announced that the coronavirus had peaked in China.
Earlier this week, as hand sanitisers were being installed at Cheltenham, Jennie Harries, the UK's Deputy Chief Medical Officer, announced that the virus could soon peak here too.
From a health and investment perspective this is excellent news: with some luck, we can expect life to soon return to normal as roving television news reporters, recently up to the top of their expensive wellies in flood water before turning their attention to coronavirus, find another topic on which to report.
Meanwhile, economic history suggests we can expect financial markets to bounce back from the current crisis. Mr Dreman provides numerous examples of how stock markets have recovered from seemingly desperate times, noting that within twelve months of four post-war crises, (the Cuban missile crisis, JFK's assassination, the 1979 oil price crash and the 1990 Gulf War), America's Dow Jones Index rose by an average of 27.5%.
Closer to home, stock market recovery from the most recent major financial crisis in 2008 was equally impressive. At the depths of the gloom and doom, in mid-October 2008, the FTSE 100 Index plummeted to a low of 3,861; by the end of December 2009, however, it had risen 53%, to 5,412.
When identifying what he calls the 'symptoms of a crisis', Mr Dreman offers more useful advice, reminding us that the symptoms manifest themselves in the form of 'legions of experts… making dour forecasts of structural damage to the nation. A common theme is 'things will never be the same again'.'
When we're bombarded with similar strains of authoritatively-delivered negativity, the temptation is to panic because we perceive an immediate threat, often to the point where we believe our survival depends upon taking immediate action.
However, people investing in say, a pension, should remember that such investments are usually very long term, often upwards of 30 years. In between times, market crashes will invariably occur, usually as a result of political or, as is presently the case, a medical crisis. As a result, many people will panic and sell, but history shows us that the longer-term impact of these crises on a pension pot fades over time, a point worth remembering if you're contemplating pressing the 'sell' button.
TAM Asset Management Ltd offer savers the opportunity to invest their savings in Investment ISA portfolios comprising a variety of different funds pursuing long-term cautious, balanced or adventurous strategies. For further details, please visit the MoneyMapp website.
Please note: with investing, your capital is at risk.
For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.