The Little Book of Common Sense Investing
by John C. Bogle is probably the only investing book you’ll ever need to read. At the 2017 AGM of Warren Buffet’s company, Jack (John) Bogle was introduced as the “person who has done the most for the American investor.”
Covid-19; What is the Investment Outlook?
Covid-19 is first and foremost a human tragedy
While markets were aware of COVID-19 in China, the catalyst for the market drop in late February was when the virus hit Europe. Then it became clear it was now a global issue. As a result of the ongoing COVID-19 crisis, global equity markets fell 30% from their Feb 20th high. Recent recovery means markets have rebounded and are now around -15% from the same levels. A 60/40 global multi-asset portfolio, which consists of 60% stocks and 40% government bonds, is down 5 – 6% over the last 12 months. Not a favourable result, but not the end of the world either.
Stock Market Expected Returns
Stock market share prices are based on an expectation of future company earnings, earnings over the next 30 years, not just over one year. We expect these earnings will suffer for between 10 and 20 months. A global recession is now evident. Investment markets and market-related investments will recover. The expected return of global stock markets remains over 5% pa. This expected 5% pa is very attractive relative to global bonds expected return at less than 1% pa. It looks likely that the massive government and central bank stimulus packages and QE will keep bond rates lower for longer. In the short-term, the movement in the Stock Markets are driven by opinions, sentiment, and fear. However, over the long-term, the global trajectory is upwards, and increasing markets are driven by one thing: earnings.
Patience is rewarded
After an investment market fall of over 20% (bear market), the average recovery period has been 15 months. The last four bear markets have been followed by 10.9 years, 12.8 years, 4.8 years, and 9.8 years of global investment market growth, respectively. The Fama/French research graph below shows that the average US Investment market return after a 20% market decline is 11.65% pa over the following five years.
Our emotions will certainly be tested. Working from home, cocooning, and social distancing have and will be challenging on many fronts. Investment market performance can test feelings also. Even in the worst historical markets, stocks never declined as quickly as they did last month. There may be several bear market rallies that give investors a sigh of relief, only to see a move to lower prices.
Reasons for realistic optimism.
Equities are attractive versus most other asset classes. Financials and real estate sectors are likely to come under pressure. Technology and sustainable, climate change industries will prosper. Emerging Markets are the geographic region most likely to flourish quickest. The recovery is expected to be reasonably quick, once a solution to the virus is discovered. A few countries have begun to ease some lockdown restrictions, including two of the worst affected, Italy and Spain.
Days or Decades?
We are very aware of both the local and global issues, particularly around employment and cash-flow, for both individuals and small businesses. As Financial Planners, we try to help you`focus on your lifestyle over the coming years and decades. We try to help you stick to the plan even when its uncomfortable, so that your pensions and investments will provide the lifestyle you are looking for in future years. Sometimes the daily news headlines can be overpowering. A little more time for activities such as gardening, painting, exercising in the fresh air, even parenting, is good for the soul, and even Mother Nature is benefiting in this Covid-19 crisis. In our opinion, cautious optimism is a better view than pessimism and negativity. I think it’s safe to say that 2020 is not turning out like any of us expected, or hoped. The past 90 days have been challenging in many different ways. It is likely the trajectory of the next decade will be upwards and onward, with many bumps and hollows along the way, just like normal. In the meantime, we are here to help. Does anyone else miss Brexit? Read More: What To Do If Investment Markets are in Freefall
Pat Leahy, Certified Financial Planner.
Subscribe to our newsletter.