Part 1- Making Smart Choices - How COVID-19 is affecting your investments

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We’re truly not in ordinary times! The Coronavirus pandemic is changing the world in ways we could not have predicted. With over a million confirmed cases worldwide, this virus has and will truly leave its mark. (Source: WHO). Businesses have had to shut down, workers are being laid off or salaries cut, streets are deserted and worst of all, we have lost some loved ones. Globally, the financial markets have not escaped the harsh realities of this virus. Some other industries such as the airlines and hospitality business are facing difficulties.

This article seeks to address both on a global level and in particular Ghana, how this virus is affecting our investments and how we may even take advantage of it.

Global Assessment

Many investors fear the virus will have a huge impact on the global economy leading to a slowdown in its growth and a possible recession. These fears have been confirmed by many world leaders. The Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva expects 2020 world growth to be below the 2.9 percent rate for 2019 (Source: Reuters News Agency). The Organization for Economic Cooperation and Development (OECD) in March 2020 said global growth could plummet to just 1.5 percent in 2020, far less than the 3 percent it projected before the virus surfaced. (Source: the New York Times). Investors’ response? Selling off relatively risky assets -e.g. shares in the financial markets and moving to much safer assets. e.g. Gold (Flight to quality).

For example, on March 12, 2020 the FTSE 100 which represents the share index of 100 companies with the highest market capitalization on the London Stock Exchange saw their worst daily loss since 1987. (Source Bloomberg). Mind you, these are companies with very solid balance sheets. But why are people selling?

Investors do not want to see huge volatility/declines in their investments and would rather have a stable minimal return than significant dips. Also, they are not particularly sure how, when and if the world economy would recover or even if there will be more turbulent times ahead.

Smart choices

For a risk tolerant investor’s point of view, I would quote Warren Buffett, who once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.” This statement even resonates better for me now as share prices are low and relatively cheap, would be a good opportunity to invest in these companies. Mind you, the prices could dip further but if you believe in the future of the company, over the long term, your investment would reap some great returns as potentially these stock prices would bounce back strongly. Again, if you have shares in these companies, do not panic, but remember that arguably these losses are just unrealized losses or paper losses and you haven’t lost these monies until you have sold off. Your losses are crystallized when you dispose of your shares.

I love the below extract from Vanguard which perfectly sums up an experience from the 2008/2009 market crash. Consider the point of view of 3 investors at the bottom of one of the worst bear markets in history, 2008–2009, when even balanced portfolios had lost almost 30% of their value.

  • “Investor 1 spoke to her advisor and decided to stick with her plan. It was a good move—she made all her money back by mid-2010

  • Investor 2 couldn't stand the pain of loss anymore, and he sold all his stocks to buy bonds. It took him about 8 years to get all his money back (by which time investor 1's portfolio was up about 70%, by the way)

  • Investor 3 decided to protect the money she had left, and she sold everything for cash. With interest rates at an all-time low, she never made her money back.”

From this scenario, it is worth noting that investor 1 made the smartest choice amongst these three investors and made her money back not long after the crash. I have seen a lot of people behave like investor 3 and rather withdraw and hold on to their cash in their bank accounts. Mind you the already small bank interest rates will further reduce amidst policy rate cuts in most countries. Worst case scenario, your cash may not withstand inflationary effects.

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Tags: covid19 | investments | finance |