At the present time, the value of your clients’ investments may be the least of their worries. Concerns about their own health, and that of their friends and family, are likely to be at the forefront of their thoughts.
However, while governments around the world take drastic measures to stem the spread of the coronavirus, one of the most immediate consequences of the virus outbreak has been the impact on global stock markets.
The FTSE 100 fell by 25% in the three months to the end of March 2020; the biggest quarterly contraction in London-listed share values since the aftermath of Black Monday in October 1987. Other global markets have seen similar falls.
While clients may be concerned about the short-term volatility of the markets, it’s important that they remain calm and focused on their goals.
To help you reassure clients, here’s some useful information.
Clients should expect short-term volatility
Whenever a client invests in equities, short-term volatility is something that they should expect and accept. Everything from geopolitical tension to the weather can affect what happens to markets around the world, and so prices will always fluctuate in the short term.
However, in the long term – and that’s what most people are investing for – markets tend to offer positive returns. The pandemic may last for months, but life and business activity will eventually normalise and so will the markets over time.
Here’s the performance of the MSCI World Index (an index with more than 1,600 constituents from 23 developed markets) in the year, three years, five years and ten years to the end of December 2019.
During the ten years to 31 December 2019, the annualised return was 10.08% per annum. That is despite the index recording a negative performance in 2011, 2015 and 2018.
In the longer term, MSCI report that the annualised return of their World Index between the end of 1987 and 2019 was 8.08%. That is despite a 40% fall in the value of equities during the global financial crisis in 2008.
If a client’s long-term goals haven’t changed, it’s unlikely that their plans should. The goals of your clients are likely to be the same as they were a week, a month or a year ago. Our investment strategies are designed with the long term in mind, and this naturally considers periods of both positive and negative returns.
Bull and bear markets
Here’s some more data to show how periods of stock market decline tend to be rather shorter than periods of growth.
- Bull years – a price increase of more than 20%
- Bear years – a price decrease of more than 20%
Notes: Calculations are based on FTSE All Share (GBP Total Return). A bear market is defined as a price decrease of more than 20%. A bull market is defined as a price increase of more than 20%. The plotted areas depict the losses/gains ranging from the minimum following a 20% loss to the respective maximum following a 20% appreciation in the underlying index. Time period: 31 January 1900 to 31 December 2018. Calculations based on monthly data. Logarithmic scale on y axis.
Source: Global Financial Data.
As you see from this chart going back to 1900, the average ‘bull’ period of stock market growth lasts for almost eight years. The average ‘bear’ period lasts a little over a year.
Clearly, bear markets can result in a significant decline. However, it’s important to consider the long term, and that, over the last 100 years, markets have always recovered.
Note: Past performance is not a reliable indicator of future results. The value of investments, and the income from them may fall or rise and investors may get back less than they invested.
Remind your clients of two other points
- Clients typically have a diversified portfolio. So, a fall in the value of the FTSE 100 (for example) will typically not be mirrored in the value of their portfolio. Clients generally have diverse portfolios that include exposure to other asset classes, for precisely this type of situation.
- Now is a bad time to panic and sell. If a client’s home had fallen in value in the short term, would they immediately put it up for sale and realise a loss? It’s unlikely. While it is very easy for emotions to take over at this time, reacting to a fall in the markets can be a mistake. Many studies have found that this is one of the main reasons why investors lose money.
Continuing to serve you during the pandemic
In line with many other individuals and businesses, we’ve taken action in response to government advice.
We’d like to reassure you that, where possible, our business will continue as normal. While there have clearly been some changes to our ways of working in the past few weeks, it’s important to underline that we are here, and available, if you or your clients need us.
Indeed, now might actually be the perfect time for clients to review their affairs, in light of the current situation and if they have more time on their hands than usual. If you or your clients have any questions or concerns, please get in touch with us. Email email@example.com or call 01454 416 653.