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The five most important investment rules in a crisis

22nd May, 2020

Don’t miss the bounce

Warren Buffet is almost as famous for his pithy quotes as his investment returns. His view? “If you wait for the robins, spring will be over.” In other words, by the time it looks ‘safe’ to invest, the bounce will already have happened.

This has already been seen in the Covid crisis. There is no apparent improvement in the global economy, the outlook for corporate earnings is still highly uncertain, but markets have bounced almost 20% from their lows. Those waiting until the crisis was over would have missed out on the recovery.

This has been repeated through history. The time to reinvest during the Global Financial Crisis was in March 2009, when the memory of Lehman’s bankruptcy was still fresh and central banks had just cut interest rates to record lows in an attempt to stop the financial system collapsing. In reality, there is never a perfect time to reinvest and it is easier to grit your teeth and hold on.

Cash is not the answer

Those who have high weightings in cash will have periods where they feel pretty good. Their savings will be worth the same today as they were yesterday and they will have missed all the market volatility. However, they will also have missed dividends and stock market growth for much of the past decade. Their savings will have been eroded by inflation.

Cash has a place. It can bring optionality to a portfolio, allowing investors to cherry-pick opportunities amid the crisis. However, it is not a long-term investment strategy. It is difficult enough to save for retirement and holding high weightings in cash is like driving with the handbrake on.

Know what’s in the price

For those with an appetite for risk, market volatility looks exciting. Suddenly there are lots of stocks trading at bargain prices. However, the market is imperfect and can be too optimistic. It can take time for it to adjust to the reality of a new situation.

As such, investors always need to consider what is in the price of the shares. Has the market already factored in a worst case scenario? Or is it still hopeful of a quick bounce back? Low share prices aren’t an opportunity in themselves. They are only an opportunity if they don’t reflect the reality of a company’s prospects. The current market rout has exposed a lot of ‘value traps’ – companies that are optically cheap, but are in fact, weak and vulnerable businesses likely to fall further.

The power of dividends

This has been a horrible time for dividends, with around half of UK companies cutting their payouts to shareholders. However, some of those payouts have only been paused temporarily and plenty of companies are still paying. The income from shares still compares favourably to that available from government bonds and cash.

Research from Guinness Asset Management serves as a reminder of the importance of dividends over time. It shows that dividends and dividend reinvestments have accounted for 94% of the total return from the S&P 500 Index of the largest US stocks from the 1940s to the 2010s. “If you had invested $100 at the end of 1940, your money would have been worth approximately $525,000 at the end of 2019 with dividends re‐invested. In comparison, it would be worth just $30,000 with dividends paid out.”

There are always opportunities

Someone is always winning. In this crisis, it has been the technology companies that have benefited from a move to online shopping, video-conferencing and home-working. While it is uncomfortable to talk about the opportunities in a crisis, there can be little doubt that the virus outbreak will change the way we live, work and play and some companies will be in a good position to take advantage. While radical changes in the midst of a crisis are inadvisable, it is worth ensuring that any investment portfolio has an eye to this new future.

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