Managing fear in a market crisis

“The only thing we have to fear is fear itself.” – Franklin Delano Roosevelt

At the time the former U.S. president made that historic pronouncement—in 1933 at the height of the Great Depression—markets had crashed. Scores of investors had been wiped out. Unemployment was skyrocketing.

Uncertainty was widespread and anxiety was real. It is now, too. Many investors are fearful as the COVID-19 crisis escalates and we careen into a bear market and global recession.

“This is not the time to hide under your pillow,” suggests Newport Private Wealth Managing Director, Peter Churchill-Smith.

“It is time to get the facts and develop a forward-looking investment plan. Simply waiting until your portfolio recovers may not be the right course of action. A lot has changed in the last few weeks and your portfolio may require changes, as well.”

Once you have the facts, Churchill-Smith suggests that investors seek an answer to this very important question to help them deal with fear: “What’s the worst that can happen to me?” The response will help you develop your own contingency plans. Equally important, it will likely reduce your anxiety over the current market crisis.

Stay calm—history shows we will recover

We can look back to history for what may lie ahead. The good news: There is a lot of evidence that markets will rebound sooner than you expect, even though this crisis may feel very different.

One of our independent managers for U.S. equities, Bristol Gate Capital Partners, recently conducted an analysis of the 23,150 trading days between December 31st, 1928 and March 5th, 2020. They found that only 60 of those days had daily market drawdowns or returns in excess of 7 per cent.

In other words, the extreme market swings we’ve seen of late are not unprecedented, but they are rare—and most came during periods of severe volatility including the Great Depression, the 1987 Black Monday stock market crash and the Financial Crisis of 2008/09.

As Bristol Gate notes:

“The annual return of the years when markets had a similar behaviour to the current period are not pleasant. However, 12 months from the end of those two-week periods, the market returns were generally positive, with only six negative returns one year later, all in the 1930s … ”

Every financial crisis feels uniquely catastrophic. But take solace in the fact that the global economy has recovered every time.

“Eventually, bargain hunters are attracted back to the market by compelling opportunities,” Churchill-Smith explains. “They, in turn, will inspire others to follow. These are the natural forces that will steady the market and start the upward climb. If you don’t have an advisor and no plan and no facts, it’s easy to become afraid.”

Understand your situation

Therein lies the challenge. Recency bias and sensationalist, negative headlines that make it seem like a crisis will never end, only fuel investor anxiety and cause them to freeze. Because investors read about market declines of 30 per cent or more, they often exaggerate the magnitude of their own portfolio losses.

But perhaps they have relatively light exposure to battered investments such as U.S. equities, for example, or a protective cash weighting, as Newport does. That could mean they’re down only a fraction of what wider market losses would indicate.

That’s why Churchill-Smith stresses the importance of working with your portfolio manager (or advisor) to fully understand what you own in your portfolio, the quality of those investments and how they’re weighted, before panicking over any potential loss in net worth.

Have a plan

The reality is that some assets are oversold at the moment, creating opportunity for anyone with a clear investment strategy, liquidity and the willingness to act.

Here at Newport, because we entered the current bear market with a reduced equity exposure and high cash weighting, we have the capital on hand to seek out value in the market, such as allocating cash to high-yield equities, corporate bonds and high-yield bonds—areas of the market that currently represent the best risk/reward, in our view. “There are real opportunities ahead to recover and grow wealth,” Churchill-Smith says.

We have a plan with targets for the deployment of our cash position. Our team is currently making adjustments to portfolios to reflect real-time market and economic developments.

Leaning on careful planning and understanding historical market trends, are the key to keeping your (completely justifiable) financial anxiety under control until the COVID-19 crisis ultimately fades to memory.