Instead, maintain a long-term perspective, even in the face of severe market swings- Old Mutual

The extreme market volatility currently being experienced due to concerns around the spread of COVID-19, commonly referred to as Coronavirus, is seeing investors exiting global equity markets in an attempt to cut their losses.  However, this approach is counterproductive; investors should, instead, ignore the daily fluctuations and remain focused on their long-term investment objectives.

“While it’s natural for investors to tend to want to guard against further pull-backs during market drawdowns, it is vital to maintain perspective as steep, short-term downturns ultimately smooth out over the long term,”  says Andrew Dittberner, Chief Investment Officer at Old Mutual Wealth Private Client Securities.

 “History shows that volatility and drawdowns are inherent in equity investing. It’s not uncommon to experience intra-year declines well over 10%, yet, more often than not, markets recover from those drawdowns within the calendar year. It’s therefore highly probable that exiting the market during periods of heightened volatility will result in investors missing the upside that inevitably materialises.”

 Dittberner describes COVID-19 as a “known unknown”, a reference to former US Secretary of Defence Donald Rumsfeld’s 2002 response about whether Iraq had been supplying weapons of mass destruction.

In his response, Rumsfeld separated military intelligence into “known knowns”, describing things we know that we know. “Known unknowns”, referring to things we know we don’t know; and “unknown unknowns”, which are those things we don’t know that we don’t know.

 Dittberner says “COVID-19 is a known unknown because it isn’t possible yet to predict the true extent of its impact on the global economy and markets”.

 “Trying to predict the future is a futile exercise: The Coronavirus is a black swan event that nobody could have foreseen. Market participants and economists alike had been trying for some time to predict what would derail global economic recovery and record-breaking financial markets. Trade wars, debt, Brexit, geopolitical tensions were all among the suspects, yet no one foresaw that a virus would potentially doing the job”.

 “This is a great example of why forecasting is close to impossible. A far more efficient and effective approach is ensuring that we remain invested in high-quality businesses that can withstand the market volatility that ensues from the onset of unknown events,” according to Dittberner.

Accepting the volatility in markets will help investors maintain the perspective and fortitude required to stay the course through both good and bad times.

 The danger for investors lies in withdrawing from the market and missing out on the early, possibly rapid, price recovery. Historical market data shows that periods of volatility and downturns are typically followed by enduring upward swings.

 Furthermore, Dittberner points out that going back to the late 1800s, the S&P 500 Index has never yielded a period of negative real returns for investors who have remained invested for a 20-year period. These periods include both world wars, the Great Depression and the Global Financial Crisis — events that arguably would have had larger impacts on the markets than the current COVID-19 outbreak.

 “This highlights the power of remaining invested for the very long-term. We acknowledge that not all investors have a 20-year investment horizon, which is where effective asset allocation comes into play.”

 According to Dittberner, the strength of an investment portfolio’s returns is correlated to the quality of its underlying assets.

“When investing in a business, our philosophy seeks to identify companies that can generate superior returns on capital. This is typically achieved by companies that have high and sustainable margins. Alongside this, we aim to identify businesses that can grow to deploy capital at those higher rates of return.

 “From a leverage perspective, we prefer lower debt levels. We acknowledge that some level of debt may be positive for certain companies, provided that there are sufficient earnings and cash to cover the interest and debt repayments multiple times. While we would expect to pay a higher price for these quality businesses given that they are superior to the market, we ensure that we do not overpay.”

Dittberner concludes by saying that with these fundamentals in place in a few years, investors should be able to look back to the COVID-19 scare and see it merely as a blip on the radar and not a significant destruction of capital.


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