If ever there was a time when investors needed sound financial advice it is now.
At the time of writing, the Australian Securities Exchange (ASX) had declined to levels not seen since 2016 with the Australian Securities and Investments Commission (ASIC) in the middle of March taking the unusual step of issuing a direction under its Market Integrity Rules requiring major market participants to cut trades by up to 25%.
On top of those factors, investors have been the subject of daily television reports detailing what appears to be a continuing downward spiral on the major share indices – spooking investors and prompting them to begin earnest conversations with their financial advisers.
CountPlus chief executive, Matthew Rowe, said the reality for many advisers was they had never before encountered the very real prospect of a recession and what that was likely to entail for their clients.
“When you consider the average age of financial advisers, not many of them would have experienced what happened in 1987 and so they are entering new territory,” he said.
The common message from advisers to clients so far has been to not over-react to the extreme market volatility and therefore risk crystallising losses. The message being conveyed is that investment timeframes should be viewed in terms of years, rather than months or weeks.
“In the short-term markets are driven by sentiment (or emotion) rather than fundamentals,” one adviser said. “As a result, financial markets typically overreact on both the upside and the downside. At some point markets will settle and then recover – although that point might be some way down the track as the world tackles COVID-19.”
However, that same adviser was sending cautionary messages to those clients who believed it might be opportune to try to pick up a bargain amid generally falling share prices.
“Share markets definitely look better value than a few weeks ago. However, there is a saying in investment markets – ‘don’t try to catch a falling knife’ – which means don’t try to buy when the market is in free fall,” he said.
The question for both advisers and their clients as they approach investment strategies in the midst of the COVID-19 volatility is how far the market will fall and the length and depth of any recession.
In that sense, the COVID-19 experience is likely to be very different to what occurred during the global financial crisis (GFC) simply because the current situation is about more than just markets and liquidity and entails Government-imposed closures of borders with all the follow-through impacts on industries, particularly travel, events and hospitality.
The reality for advisers is that while, predictably, some significant stocks such as Qantas (QAN) and Virgin Australia Holdings (VAH) have headed south off the back of successive rounds of bad news after hitting some significant peaks not less than a few months ago, portfolio staples such as the Commonwealth Bank (CBA) and Westpac (WBC) have exhibited similar downward trajectories since the worst of the COVID-19 news began hitting in late February.
While advisers will be judging significant portfolio staples as a “hold” they may have much explaining to do around why other exposures should be held and for how long.