The growing fears around the economic impact of the spread of COVID-19 (Coronavirus) caused sizable global stock market falls on Monday 24th February, with the Dow Jones and the FTSE 100 both closing in the region of 3.5% lower and further significant falls being incurred as the week progressed. The news coverage around this may well cause concern for investors.
Our message is the same as during any other periods of heightened market turbulence – asset based investments are generally only going to be suitable for those with appropriate capacity for loss and a medium to long-term investment horizon. Individuals who do not have sufficient capacity or horizon should not be invested in potentially volatile investments, whereas those who do have such capacity and are prepared to invest for the longer term should not be concerned about short-term fluctuations in their investment values.
As the number of Coronavirus cases outside of China continues to grow, it remains unclear how long it might take to contain the spread or what the overall economic impact of the associated disruption might be. There are naturally worries that the growing lockdowns both inside and now outside of China will lead eventually to significant international trade disruptions and ultimately disturbances to the supply of goods and services.
However, as always investors should be wary of the dangers of trying to time the markets. By disinvesting or delaying investment decisions simply because of market downturns caused by today’s headlines, individuals will be at real risk of missing out on longer term growth or crystallising investment losses unnecessarily.
Asset allocation models generally provide investors with a diversified portfolio of both growth and defensive assets and should be based upon the investor’s risk strategy and long-term investment objectives. Asset allocation is usually constructed to provide the prospect of a range of potential investment outcomes over a defined longer term (typically 10 years). Any stochastic projections provided in conjunction with a model will take into account scenarios of market downturn and significant volatility.
In other words, asset allocation models will remain suitable for longer term investment and there is no reason to automatically assume that any short-term market volatility caused by Coronavirus concerns or any other market headwinds will result in long-term results significantly outside of the range of given potential outcomes.