With hindsight, it seems obvious that the highly contagious coronavirus would spread from the original epicentre in Wuhan, China. It also seems obvious now that the rest of the world would be forced into lockdown to try to stop the spread of the virus, and that the markets would suffer a big hit as the world economy ground to a halt. Still, you can’t blame your two months-ago self for not knowing how things would change.
There is uncertainty now about how badly the virus will impact our health and that of our families, friends and wider communities, especially the more vulnerable members. There are also concerns about how this pandemic will impact the country, the economy and, on a more personal note, our own savings and investments. We all want clear answers but, the reality is, no one knows what is going to happen.
So, what should we do when it comes to our investments?
First of all, understanding what has already happened is important. Markets across the world have sold off dramatically. Developed Markets, Emerging Markets, the US, South Africa have all sold off between 25 and 35%. Even so-called “safe-haven” assets, such as gold and US Treasuries, have sold off. The panic has seen equity market moves as large as a decline of 12% in a day and climbing or falling by at least 5% every day over the last 8 days.
The market moves mean that your portfolio will also have sold off, with very large daily changes. Investors who have a long-term time horizon, most of whom are invested in the 10X High Equity portfolio, have sold off about 19.3% to 17 March 2020.
Investors with a shorter-term time horizon, for example those retiring in the next five years, are invested more defensively, and will have preserved their capital since the 10X Defensive portfolio is down by only 2.5%.
Turbulence like we are experiencing now might make the relative certainty of the 10X Defensive portfolio look more attractive to all investors, even if a high equity portfolio has been proved over and over again to be the best choice for a long-term investor. Anyone who has an investment horizon of five years or more can afford to ride out the highs and lows that a high equity fund inevitably experiences. The other side of the bargain is that they access the higher returns earned over longer periods of time.
That said, some people are just not cut out for the rocky ride, even if it will secure them a better return over the long term.
However, it is very important for anyone considering switching out of the High Equity Portfolio at this point to understand that this will mean locking in the 20% decline year-to-date.
Locking in, or realising, the loss of 20% is the cost that you would pay for a move to relative safety at this point in time. The alternative is to stay invested in the portfolio that you are currently in, which might mean further sell-offs and more uncertainty in this tumultuous period, but would also mean that when the market recovers (and markets have always recovered) you can enjoy a recovery in line with the sell-off experienced.
How does this crash compare with the 2008 Global Financial Crisis?
In 2008, the FTSE/JSE All-Share market sold off more than 40% over an 8-month period. In that time period, the 10X High Equity portfolio sold off more than 22%. The JSE is currently down 32%, with the 10X High Equity portfolio down 19%.
It is important to note that while the previous sell-off took 8 months, it took just another 10 months for the 10X High Equity portfolio to return to its peak before the crash. It took South African Equities a little longer, with the JSE recovering in 19 months.
The key takeaway from this is that the selloff was temporary, a rocky 18 months, but a year and a half later we were back at all-time highs. In the 2008 example, panicking and selling your high equity investments for the certainty of a defensive portfolio after the market had already crashed would have made the loss permanent. Had you stayed in the High Equity portfolio, with all the attendant uncertainty, you would have recovered your position.
On writing this, the 2020 market sell-off is approximately 70% of the size of the one in 2008. While we may be tempted to try to hide out the turbulence in cash until we have certainty regarding the full impact of Covid-19, the reality is that once certainty exists, markets have already factored this in ie the gains would have been crystalised, leaving those sitting in cash behind.
By Chris Eddy
Head of Investments at 10X Investments
This article is the opinion of the author and is for information purposes only. It does not constitute advice as defined by the Financial Advisory and Intermediary Services Act. 37 of 2002. Past performance is not indicative of future results.