Over the last two weeks, in Early March 2020, share markets across the world have experienced some the largest 1-day drops in share prices since 1929. The main reason for this was the markets’ interpretation of how the Coronavirus would affect the long-term economy in a situation where economists were already saying that some markets were overvalued and ready for a correction.
Is it time to review your current investments?
Understanding stock market cycles
For the average person, the current headlines make for scary reading. The consensus is that share markets will from time to time suffer large falls, but generally recover to move on to ever higher highs. Will Coronavirus have a different outcome?
For those who are interested in an historical view of past bear markets, Wikipedia has a very good summary of major bear markets since the Tulip Mania Bubble of 1637.
These are some of the more memorable in recent times:
Wall Street Crash of 1929 lasted for 4-years and lead to the Great Depression.
1973-74 Stock Market Crash, lasting 23 months, resulted in a dramatic rise in oil prices, the miners’ strike and the downfall of the Heath (British) government.
Black Monday (19th October 1987) where the American stock market lost more than 20% in one day. This event resulted in the way stock markets are managed in rapid price changes.
United States bear market of 2007-2009, where several markets dropped more than 50% and till then was considered the worst stock market crash since 2029.
It is interesting that already, Wikipedia has listed a new Bear Market, the Coronavirus Stock Market Crash of 24 February 2020, just a couple of weeks after that date. At the time, they believed that the fall was most likely caused by breaks in the supply chain from China. This meant that many companies worldwide were affected, resulting in fears that a world economic recession was likely. Investors started to move funds from the share market to safer options such as bonds and gold.
Since that time, Wikipedia is updating the effects of the Coronavirus whenever another major milestone is reached.
It is times like this, the one quote that springs to mind is Warren Buffet’s old chestnut
Be fearful when others are greedy, and be greedy when others are fearful – Warren Buffett
This is easy to say when you are one of the richest men in the world.
This does not mean to say that you should panic, every time the news delivers a scary headline. But it is time, to sensibly stop and reflect. More importantly you should be thinking of your personal circumstances.
Should you consider if your emergency cash funds need to be increased?
Some people don’t consider themselves investors, however, anyone with a superannuation fund, will most likely have a considerable portion of that money invested in shares. Any serious fall in share market prices is likely to impact every working Australian.
A quick Google search has found that most superannuation funds are writing articles about how the Coronavirus may affect the value of your funds. As these are “stories in the making” every day, you should keep a watch on reports from your fund. If they have a regular newsfeed, now may be the time to register and read what they have to say.
If you do have a financial adviser, this may be the time, to touch base and update your current financial situation if it has changed. This is particularly important if you may need to access some of your savings in the next year or so. Together you can make a strategy which balances the risks and rewards of owning growth stocks such as equities.
You should also discuss whether your income will change if you need to be quarantined or hospitalized as a result of the Coronavirus.
Ask your adviser if he uses Financial Mappers Pro. Here he can quickly demonstrate the effect of a falling share market price on your portfolio. Together you can collaborate on the future management of your finances.
For those who are dedicated DIY Investors, it may be time to reflect on the current share market and evaluate the immediate and long-term risks to your investments from Coronavirus.
If you are an investor who does not have access to paid services, there are opportunities for you to receive free information. However, they will most likely be trying to sell you more advanced information which in times like this, you may see value in purchasing.
One free service I use is Colin Twiggs’ Chart of the Week. Each weekend you will receive an email with one chart intended to highlight the mood of the market in the previous week.
On the 29 February 2020, this was his chart of the week and this was his comment:
It’s not a pretty sight. The ASX 200 fell close to 10% in a single week. The severity of the fall suggests that sellers are committed, and buyers are scarce. Breach of support at 6400 is highly likely and would offer a target of 5400 (a 25% draw-down). A V-shaped recovery is unlikely.
On the following weekend, 7 March 2020, the chart related to the fall in 10-year US Treasury Notes. This was his comment:
Long-term treasury yields have plummeted, with 10-year Treasuries now yielding a record low 0.70%. CPI is running at 2.50% (Jan 2020) which means that real interest rates are a whopping negative (-1.80%).
Financial Mappers for DIY Investors
Financial Planning Software to Manage Share Portfolio
No one can predict how the Coronavirus will play out. Likewise, no can predict the long-term effect on markets.
However, there is a lot of research on how markets have previously responded to bad news and how long share prices took to recover. Each event was caused by a specific series of circumstances. The speed at which the markets recovered was often dependent on Central Bank initiatives.
What Financial Mappers will do for you?
You enter your current financial position and then add how you intend to manage your money in the future. Once your plan is created, you can access a number of modelling tools to see how your future may play out. Here are some of the tools you can use to consider a change in the value of assets.
Capital Growth Modulator
With the Capital Growth Modulator, Financial Mappers has included a series of short economic cycles based on previous events. For both Real Estate and the Share Market, these cycles include, Rapidly Falling Price, Rapidly Rising Prices and a Bubble and Bust Cycle. These cycles can be commenced in any year of the plan.
Here is sample graph of a Bubble and Bust cycle starting in Year 3:
If you want to be very specific in your modelling of share price falls, you can choose the option, Custom Modulation, and enter your own scenario. In this example the scenario is that the share market falls 30% this year and a further 10% the following year and then returns to long term average returns.
Financial Mappers maintains Historical Data from the Year 2000. Here you can tailor-make your historical data. You can start from any year; and you can average the data over a specific time period. You can also use the actual changes for each year.
In addition, you can choose, one of four Economic Cycles between 1986 and 2011. Each cycle is different, with the cycle from 2002 – 2011, being the worst. This period includes the GFC.
To find out more, read some of my previous news feeds:
- Forecasting personal financial investments without endless spreadsheets.
- How will your shares perform with falling share market prices?
- When to sell your Shares (Maybe it’s just “The Wobbles”
Watch the video: I want to Manage My Investment Portfolio
Glenis Phillips SF FIN – Designer of Financial Mappers
Reviewing Share Market Index – ASX 200
Bookmark the website Market Index so you can check out price changes in the ASX200 over different time periods