Long-term investors, don’t panic!
Global trading markets experienced an absolute disruption (expressed in investment terms) last week.
As fears of contagion from the coronavirus with the possible concomitant reductionor freeze in supply chains’ access for global industries, and many securities teetering on bloated valuations according to investment gurus, finance managers’ sentiment moved to conservative retrenching by selling out of riskier investment positions into calm havens.
Bloomberg published an article on February 25, headlined: “In grip of coronavirus, traders pay whatever it takes for safety”.
The article went on: “The price of safety has rarely looked so high across major asset classes. Confronted with the coronavirus, investors seem more than willing to pay it.”
Each of those days, US Treasury bond purchases — the first choice in parking cash safely — skyrocketed, registering some of the highest prices and the lowest yields on record, as the United States Dow and S&P 500 indices, and other major indices across the world reflected the plunging attitude of capital market traders as well.
An explanation of the bond inverse price to yield (not the same as the coupon interest rate) ratio can be read under sources and references below.
Why do investors flee riskier assets for safer, dull, low-interest bearing sovereign bonds, particularly US Treasuries? Because they know they can get their money back — instantly on trading platforms, or holding a bond to its maturity!
The United States is still considered the bastion of safe investments the world over. Every country, well almost, holds US Treasuries. Russia is conspicuously absent from the US Treasury’s December 2019 list. Japan holds the highest amount, more than $1 trillion dollars, then China, United Kingdom, Brazil, Ireland, Luxembourg, Switzerland, the Cayman Islands, and on, even Bermuda in 22nd place — reflective of international re/insurance markets, hedge funds, and the like.
Individual investors, that according to statistical trackers of investor trends, e.g TD Ameritrade Investor Movement Index, had embraced the ever-higher equity value climb over the last few months after a prior flat year, were set back this week by the fall in various indices valuations as well.
However, we do know that in prior capital markets’ declines, small investors have maintained far more resilient confidence of their convictions than the large financial institutional investment managers. Individual investors have held on long-term for market recoveries, rather than selling down.
Investment asset allocation also plays a large part in minimising risk in falling valuations. A diversified middle-of-the-road risk portfolio will, generally, contain various sovereign debt bonds to help alleviate sharp valuation downturns.
Investor’s Business Daily says it all, far better than yours truly although qualified financial planners across the board do echo the same message. “Stay the course. Don’t go to cash with the portion of your mutual funds that are devoted to an investment plan based on a long time horizon.”
If you feel you must sell individual securities that you hold, research carefully again about why you bought these stocks originally. Were they good, viable companies with great future prospects and still in business? You still buy their products?
Consider emulating the great Warren Buffett, a buy and holder of good companies. Nor does he sell out due to simple market disruptions.
Is this another temporary market blip, or are we looking at another market downturn that may lead to something more? Whatever the outcome, keep in mind that markets do and have recovered.
What remained for final settling values at the end of this leap year week is speculation as this article must go to press by Thursday, February 27.
For the ordinary person and individual investor — just keep in mind the following:
— Hang tight: don’t do anything drastic with your investments. Markets do recover, sometimes in the short run, sometimes longer. Hold the thought that very good profit-producing companies do not go out of business because capital markets are unsettled. You still have to purchase services and goods just to go about your daily lives.
— Keep in mind the whole point of diversification, exemplified in the above discussion about the differences between equities and bond securities and their non-correlation in challenging economic environments. Your investments, generally, pension and mutual funds are managed for broad diversification. Yes, they may drop in value (on paper), but it may not be as much as the overall market. Over time, diversified portfolios will return to positive valuations.
Moneywise’s big birthday
On February 26, 2000, yours truly started writing a financial column for The Royal Gazette. The first column article focused on, you guessed it, “Investing in the stock market — for absolute beginners!” (http://www.royalgazette.com/article/20000226/BUSINESS/302269993).
A very large thank you, dear readers of the Moneywise column! I have been incredibly privileged for this wonderful opportunity to share financial knowledge, opinions, and help for you on your own financial success journeys.
I thank you profusely for your support, commentary (both positive and corrective), and consistent interest in all things financial in Bermuda over the last 20 years.
Please continue those letters and comments to me. In sharing your problems, challenges, and insights with me that I keep confidential always, we can all benefit in better understanding of managing our financial lives in Bermuda.
Ready For The Next Stock Market Crash? Here’s How To Protect Your Portfolio by Paul Katzeff, 09/13/2018, https://tinyurl.com/rbxhso3
See Major Foreign Holders of Treasury Securities: https://ticdata.treasury.gov/Publish/mfh.txt
Demystifying the issues with bonds and what they mean to investors, Moneywise, Martha Myron, The Royal Gazette, November 7, 2009, https://tinyurl.com/s7wm47a
TD Ameritrade Investor Movement Index, https://tinyurl.com/s7vkfqf
List of stock market crashes, Wikipedia, https://tinyurl.com/orc6nc9
• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Contact: firstname.lastname@example.org
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