Market comment - Q&A: Grip in times of turbulence

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As every investor knows: investing goes with ups and downs. The downs of the last few weeks are, however, downright nerve-racking. As an investor, how do you keep a cool head? And what is the best strategy? In this Q&A, Judith Sanders, investment strategist at ABN AMRO, offers mental support for these turbulent times.

No investor can have missed, that since the outbreak of the coronavirus, it has been turbulent on the stock market. At the beginning of the corona outbreak it seemed that the consequences would be limited and that markets would be sufficiently resilient to absorb the consequences. The market circumstances seemed positive, with low interest rates, inflation, unemployment and of course the stimulus measures of central banks. But we now see that the coronavirus is leaving deep scars on the global stock markets, on top of the human suffering of those affected. Leading stock exchanges fell sharply in recent days: last Thursday, both the Amsterdam AEX and American Dow Jones stock exchanges even recorded the largest fall since 1987.

This type of decline is very uncomfortable and undermines our sense of (financial) security. People's first reaction to an unsafe situation is to flee, but that is not the best reaction when it comes to investing. That is why it takes more than an average willpower or perseverance to remain calm. To provide some background, I have listed the most important questions and answers. 

  • What causes this uncertainty?
  • What are pitfalls for investors?
  • Who keeps an eye on your investments?
  • What is the best thing to do for investors?
  • Is the grass greener elsewhere?

What causes this uncertainty?

First of all, we expect the virus to be contained and we expect to get it under control. We are already seeing positive developments in China. The big question currently is: when is this going to happen in the rest of the world? This mainly depends on the effect of the measures against further global spread. On top of that, we have to deal with the oil war with Russia unleashed by Saudi Arabia, resulting in an oil price plunge in a short period of time. This may be beneficial at the petrol station, but again detrimental to the financial future of oil and shale oil companies in the US. It was precisely owing to these shale oil companies that the US became independent from oil from the Middle East.

Regarding investors, however, they want to know whether the price of a share or bond is in balance with what they get for it. The events surrounding the coronavirus and the oil sector make it difficult to make this calculation. Because in order to do this properly, we need estimates of future economic developments, and profit and turnover expectations of the companies on the stock exchange. And that is difficult as these expectations are constantly being adjusted downwards, now that we are confronted almost daily with reports that areas and even countries are being completely cut off from the rest of the world, employees are being sent home, schools are being closed and so on.

And if there is something that investors don't like, it is uncertainty about the future. The past (including the credit crisis, attacks 9/11) has taught us that in these circumstances expectations are always downgraded very quickly and harshly and perhaps too far. This, in turn, leads to sharp declines in stock market prices, which, according to historical data, is often followed by a period of sharp profits in the period thereafter.

What are pitfalls for investors?

Despite the storms on the stock market, it is important to remain calm. We all know this in theory, but it is not easy when you see your carefully built-up capital shrink day by day. Still, it is an important starting point. Research shows that investors often make choices based on feelings and emotions, and often these choices turn out to be irrational and misguided. An example in behavioural finance (a scientific approach to human behaviour in finance) is the 'loss theory'. This theory shows that people value losses and profits differently: it shows that the negative feeling of loss can be twice as powerful as the positive feeling of profit. As a result, the investor puts too much emphasis on not losing money, and too little on the chance of profit. As such, with this knowledge in mind, we know that it is extra difficult to stick to your original investment plan when the stock markets are falling for days in a row.

The most important thing is to recognize these pitfalls and to make sure that you know how to avoid these erroneous choices as much as possible. This requires a planned and systematic way of working. In fact, looking at the investments from a distance and without emotion. Within the bank, the experts do this for the client.

Who keeps an eye on your investments?

We have an international team of investment experts who meet in the ABN AMRO Investment Committee. The committee translates financial market events and economic expectations into investments. Also, the committee works closely with ABN AMRO's Group Economics.

Group Economics carries out analyses based on economic data. What do we expect the economy to look like in the next two years? We look, among other things, at economic growth, inflation and interest rate expectations.

Once we have summarised these data, our investment experts look at the valuation of equities and bonds. The outcome of these economic expectations and the valuations come together in a committee opinion.

On this basis, we decide to invest more or less in equities, and more or less in bonds. We then make a subdivision across all different portfolios. These changes are then implemented by portfolio managers in various teams. In this way, we ensure that the portfolios fit in well with current events and the client.

Do you have an advisory relationship with ABN AMRO? In that case, the model portfolios are set up on the basis of the investment committee's policy. You then work with your adviser to put together the portfolio. If you invest by yourself, you can compile your portfolio on the basis of all available information about our investment strategy.

What is the best thing to do for investors?

There is a good chance that your portfolio is currently not in line with your expectations and objectives. This happens under the influence of extreme turmoil and ditto circumstances. The past has taught us that this is not the time to make drastic policy changes. Moreover, adjusting the portfolio now increases the risk of missing out on a recovery that will present itself sooner or later. And: if you get out now, when will you feel comfortable to get back in? There is a good chance that you will wait too long, along the sidelines, held back by emotions.

Do I have to buy now or add money? That is a question that is difficult to answer unequivocally. Perhaps you are familiar with the phrase 'buy the dip' (buy at the lowest point) and, looking back, this could be a very nice time to step in. But beware! This current level does not have to be the lowest level. Think in advance about whether buying or expanding the risk in the portfolio suits you. If this is the case, buying in advance is worth considering.

Is the grass greener elsewhere?

It may well be that one portfolio is doing better or worse than another. But often, this difference is temporary. That is why, from a return perspective, it is not wise to change your investment strategy. To give an example: We now see, for example, that sustainable portfolios do better than traditional investments. This is because within the sustainable portfolios, we do not invest in the oil and mining sectors, for example, which are now being hit hard. Conversely, we have also seen this effect in the past, for example after the election of US President Donald Trump in November 2016. At that time, the oil and mining sector performed above average and sustainable portfolios lagged behind. In the long term, these events are evened out, at least, as long as the same investment strategy is followed.

In short: stick to your plan if at all possible. The past has taught us that this, combined with a well-diversified portfolio, is the best way to achieve the desired investment result in the long term.

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