Amidst the panic and chaos of both COVID-19 and an unpredictable stock market, you know a couple of things for certain – wash your hands (A LOT); and  practice social distancing. But what about your money? What can you do when the market crashes?

Yes, the markets are low and the virus is coming, but the WORST thing you can do now is to panic and run.

Avoid the hysteria, and hold onto your investment plan. Here’s what you need to do when the market crashes…

Show notes

• [01.00] Some background...

• [06.07] The 2 major things that happened in the last week, and why things went pear-shaped.

  • Oil dropped to $30 a barrel.

  • Coronavirus moved to being a global thing.

• [10.08] Is this another 2008 global financial crisis?

• [12.00] How does this all affect you? (And what you need to do when the markets crash)

  • Top Tip: DON'T PANIC AND RUN!
    

Quotes from this episode

"In most countries cases, the global investment that flows into and out of a country impacts it far more than the local shocks." - Lisa Linfield

"The thing that you need to know about the stock markets, is that they are predictive." - Lisa Linfield

"The reality is, you make or you lost your money on only two days: the day you buy and the day you sell." - Lisa Linfield

"Investing philosophy always says: buy low, sell high." - Lisa Linfield

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Transcript

Lisa Linfield:

Hello everybody, and welcome to today's episode of Working Women's Wealth. For those of you who are regulars, this week's episode should be an interview as I've predictably alternated each week between an interview and a solo since I began. However, I've interrupted that predictability because as you may all know, the markets over the last week have been anything but predictable and I feel like an event like this only happens every decade or so. So it's worth us sitting down for a chat right now as all things are chaotic. So in order for us to discuss what's happened, I want to give you some background so that we're all on the same page.

Lisa Linfield:

The flow of money is more often than not a global thing. That is to say that in most countries' cases, the global investment that flows into and out of a country impacts it far more than the local shocks. This is so important and I can't ever stress this enough to my wealth management clients. The very first decision that global investors make when going through their decision tree to invest is firstly, do I invest in developed markets or emerging markets? This is their first choice. If the return on investment was exactly the same in a developed market and an emerging market, they would choose to invest in developed markets because the risk of political and social conditions is far less. But things are never equal and often you can get a better return in an emerging market after you account for the risk.

Lisa Linfield:

And so that's when the money will move into emerging markets from developed markets. Now, once they've made that very first decision, the second decision they make is which country in each of the developed or emerging markets do they choose? So if they decide they're going to invest in an emerging market, they will then have to choose between, for example, Brazil, Russia, India, China, Tokyo, or South Africa. If the decision is developed markets, then they will look at the US or the UK or Europe for example. In the last few years, Trump has injected a significant amount of money into the US economy by cutting taxes, especially for businesses. So when businesses suddenly have more money that used to go to taxes that they can spend either in growing their business or paying people more without needing to even sell one more item, it stimulates the economy.

Lisa Linfield:

So the decision for global investors has been easy. There's more growth in a safer developed country called the US. Now the only time the US took strain in the last few years was when there was the trade war with China because it meant that people would have to pay more for Chinese goods in America and American companies that made their money by selling to China would have less sales because those goods would now become more expensive in China as a result of the tariffs. The minute that happened, the markets punished Trump for this and they dropped and this put enormous pressure on him. And so he ended up resolving the issue with China late in November, December, just before the next round of tariffs were supposed to come in.

Lisa Linfield:

As a result, two things happened over the last five years. Investors put more money into developed markets, especially the American markets as Britain and Europe are going through Brexit. So money didn't flow into emerging markets such South Africa and their stock markets did badly. Secondly, the tax cuts and extra money everyone had meant that instead of the natural cycle every five years or so of going from a growing economy into a shrinking economy and back to a growing economy, America stayed growing. As a result, the US markets had one of the longest growth cycles in history, an 11 year bull market. But over the last year, there have been signs that things were beginning to turn.

Lisa Linfield:

Two of the biggest predictors of trouble coming is the manufacturing index and the Baltic Dry Index or what's called the commodity shipping index. In human's peak, those indexes measure what's been made, manufacturing, and what's been moved, shipping. Over the last year, both of those have started to decline triggered by many things, but in particular this trade war between America and China and the uncertainties of the tariffs that were supposed to be coming in. Now when your two biggest economies in the world are fighting with each other and threatening to put more tariffs or taxes on each other, that was a major factor in last year's new cycles, which stopped manufacturing people from making more stuff and shipping people from moving the stuff around the countries.

Lisa Linfield:

So those signs were starting to show and people were starting to worry as to whether we would be moving into a global recession. Now that brings us to what happened in the last week and why things went so completely pear shaped. Effectively, two major things happened. Oil dropped to $30 a barrel and the coronavirus moved from being a China thing to a global thing. So let's take those one by one. I'm going to start with oil. Oil is a major cost for most countries and a money spinner for a few. Two things collided that almost never happen at the same time for oil. A supply issue and a demand issue. Usually it's one or the other.

Lisa Linfield:

On the demand side, this trend I spoke about of the reduction of the commodity shipping index and the manufacturing index of making and moving stuff meant that the demand for oil to move these goods had already started to decline. Then there was a double whammy. The coronavirus closed travel between countries. Whilst it was just China or just Italy, it was one thing, but on Sunday when Trump announced that he was going to close the American borders to European travel and all the European countries started closing their borders, then major panic on the demand for oil kicked in. Simultaneously, there was a supply side issue. Essentially Russia and Saudi Arabia, two out of the three largest oil producing economies engaged in a little game of chicken right at that moment trying to see who will blink first.

Lisa Linfield:

What resulted is that both countries put a huge amount of oil into the market, way more than there was actually demand for, and so the price of oil rock bottomed. Now America is a major producer of oil. One of the world's biggest now. And the threat to their economy triggered panic. Then there's the coronavirus. The second big issue, the biggest threat of the coronavirus is the restriction on travel. The minute business can't travel for meetings and tourists can't travel for pleasure, the travel and entertainment industry is under significant threat. Airlines face bankruptcy, restaurants, hotels, Airbnbs, taxis, Ubers and all the people employed by them face significant threat.

Lisa Linfield:

Companies are no longer hosting events and sports events are no longer taking place, further damage to those travel and entertainment business. Even corporate training isn't happening at the moment. So both the oil issue and the corona issue have happened at a time when things were starting to enter a natural downward cycle. People were already asking, when will this massive bull market and positive economy turn? When is the recession coming? And everybody was wondering what would be the trigger? The thing that tipped it over the edge, it seems that these two issues, oil and coronavirus created a perfect storm to trigger the markets to reverse. The thing you need to know about the stock markets is that they are predictive.

Lisa Linfield:

Effectively, human beings take the information they have or in many cases think they have, and try and act before everybody else does. What happened this week is that people predicted that the impact of the coronavirus and drop in oil price would push the global economy over the edge into the recession that everyone had been waiting for. So it leads people to the next question. Is this another 2008 global financial crisis? The simple answer is, not really. The major reason is that 2008 was caused by a fundamental structural issue within the financial services sector with many different financial elements coming into pay.

Lisa Linfield:

Two of them being complex financial instruments related around mortgage debt and repackaging, and secondly, banks holding too smaller safety net in terms of their own savings or what's known as the capital adequacy ratio. The amount of money they have in their savings accounts for their own rainy day. So when 2008 hit, some banks didn't even have enough money in their savings accounts to cover their own debt, let alone continue to lend to small businesses or consumers which had not going to fix to both of them. This current issue is caused by external events, a trade war and trade terrace reducing manufacturing output, an oil war between Russia and Saudi Arabia and a virus.

Lisa Linfield:

All of those will reverse or reach new normal levels at some point. And since 2008, the federal reserve banks of almost all countries have been slowly increasing the amount of savings or capital adequacy ratios that the banks need to hold. So when trouble hits, they can still remain in business, still cover their debts, and still lend to small businesses and consumers. So now that we know what has happened, why it happened, the big question remains, how does it affect you and what do you need to know about it? This week I wrote to all my wealth management clients, so I'll share the same advice that I gave to them with you.

Lisa Linfield:

My little girls, watch a spinoff of the Lion King and there's a zebra whose famous saying is, "Panic and run," "Panic and run." However, when it comes to the stock market, that is by far the worst action to take. The biggest reason why most people never make the growth returns they need to make over the period of their investments is that they sell low and buy high. They panic and run in the midst of this type of market when it drops really low. The reality is you make or lose your money on only two days, the day you buy and the day you sell. Between that, like now, there are times when you have what's known as paper losses where although the value has gone down on paper, until you actually sell, that loss can just as easily turn around in a few months and become a gain when the markets grow.

Lisa Linfield:

But if you sold and went into cash, you've locked in that loss and have no chance of getting your money back when the market's rebound. A study by JP Morgan over 20 years of stock market data showed that if you took your money out of the market and happened to miss the 10 best days out of the total 20 years or 7,300 days, you would make just less than half of the money you would have made if you just left your money invested. If you missed the 20 best days out of 7,300, you would have ended up losing money over the 20 year period. The moral of the story being you need to stick to your investment plan. This last week of a bouncy market was exactly that.

Lisa Linfield:

If you had sold out on Thursday because the market had dropped by 26% since February after the US markets had dropped so radically, you would have missed out on the 9.3% jump that happened on Friday in the US markets. There is great opportunity when markets drop. I personally am buying now and Warren Buffett always says you need to buy when others are scared. I'm moving cash into shares and I also successfully did that after the aftermath of 2008. But when people ask me is it a right time to buy for them, I have no idea. I cannot forecast if the coronavirus will get under control. I cannot forecast if Donald Trump is going to use this as an excuse to cut tax rates again to ensure he's elected. But what I do know is that I will never perfectly time the bottom and over time the market will definitely rise.

Lisa Linfield:

For me personally, my timing is longterm. Any money that I invest now, I don't need for seven years or more. And over that long period of time, the markets will rise. So I see these current times as opportunity, opportunity to buy because I haven't sold and realized any losses. But I never ever, ever would advise any of you to follow my strategies because my strategies are right for me. But investing philosophy always says, buy low, sell high. And make sure that you don't get caught up in all the hysteria now and sell low because you're going to end up having to buy high.

Lisa Linfield:

So whilst the markets are bumpy and it's difficult for us all to digest, and there's fear and panic everywhere, not only because the markets are bad, but because the virus is coming, we all need to hold on to our plan, read a lot less of the news update, and make sure that we just keep focused on facts and the future. Hold tight everybody. Have a great week. I'm Lisa Linfield, and this is Working Women's Wealth.