A key part of investing is anticipating what the future might look like. And right now, it’s tough enough to picture what the next day holds—much less what smart moves we can make for our five- or ten-year plans. That’s because COVID-19 isn’t just affecting the health of people around the world. It’s also affecting the health of the economies of the world.
In all economic downturns, people start to wonder about their investments. And now is no different—what’s the best investment strategy during this unprecedented pandemic?
Well, while the future is nearly impossible to predict (and we’ve certainly been reminded of that fact recently), we can still try to prepare. When planning for the future, it may be helpful to look at what investors are doing right now. What’s their point of view of the market? Do they feel optimistic about things overall? What kinds of strategies are they using to manage their portfolios? And how are they encouraging companies to promote a stable recovery?
How investors manage money during COVID-19
Whether you’re an aggressive investor who manages your own stocks and bonds, or you take a more hands-off approach and use a brokerage, it’s a good idea to get a feel for what major investment managers are doing right now.
Looking To The Past
When the future is blurry, smart investment managers look to the past. Trends guide their investments in the good times—and the bad. As unprecedented as this pandemic is, we can look to other major market events through history to see how people managed their money then. It may even ease our anxieties. Although the last two centuries have gone through massive social and economic changes, investments have generally delivered consistent returns in the long-term.
Think about it—in just two centuries the country became vastly more industrialized, saw civil warfare, became a global superpower, went through a Great Depression, and fought in two world wars. Not to mention several bear market recessions brought on by housing crises and tech bubbles.
Despite all of this, “stocks have yielded between 6.6 and 7.2 percent per year after inflation in all major subperiods,” Jeremy Seigel points out in his book Stocks For The Long Run.
He goes on to explain that even the devastating stock market crash of 1929 was just a blip when you look at the market as a whole. “Bear markets, which so frighten investors, pale in the context of the upward thrust of total stock returns.”1
And it isn’t just American markets that Seigal has studied. From Japan, to Germany, to the UK, there may be some market volatility in the short run, but these markets see profits in the long run.
Ultimately, changing your long-term investment strategies when you’re reacting emotionally can prove more harmful than helpful.
Looking to The Future
While no one can make a sure prediction of the future, investors are rebalancing their portfolios as they look at what kinds of products or activities may increase—and which ones may struggle for a while longer.
Although almost half (47%) of investors say they aren’t avoiding any specific sectors due to the crisis, 34% said they will be avoiding retail-focused investments in 2020. With supply-chain problems due to restrictions and sick workers, as well as layoffs and stay-at-home orders affecting how people shop, this seems to make sense. Another sector that may have a slow recovery is travel and tourism, where it is impossible to predict when people will feel comfortable flying again.
Investors do see some opportunity, however. Healthcare-focused private equity is being watched closely, as healthcare systems around the world work to overcome COVID-19. 36% of investors plan to target the sector in 2020.2
Millennials in particular see some opportunity. Coming through an economic recession brought on by a housing crisis, Millennials are used to adapting to difficult markets. And the crisis of 2008 seems to have prepared them for extreme market volatility. More than 95% of Millennials surveyed by Wealthfront have an emergency fund for a situation like this, and almost 80% have at least 3 months’ worth of expenses saved.
Because of this preparedness and resiliency, around half of those surveyed say they’ll actually increase their investments over the next few months. Millennials saw one of the longest-running bull markets come out of the 2008 financial crisis, so they know markets rebound—and have the time to see that happen.3
Engaging directly with companies
When COVID-19 hit, it changed how companies do business, in many different ways. With work paused, products aren’t being made. Companies reevaluate their earnings, which affects their investment valuation. Workers are furloughed or laid off, which means they can’t buy products and services. Those workers also aren’t making products, which affects the supply chain.
When things change so drastically, so fast, the little holes in the system become big issues. Investors have to look at the whole picture, which includes ensuring working conditions aren’t worsened, and workers aren’t getting sick. Responsible labor practices are essential—not just as a basic human right, but also to avoid more harm to companies and economies.
Large investors are also able to use their connections to companies to coordinate an economy-wide response. By publicly supporting government interventions that help the market, as well as adjusting their expectations to be more flexible when supporting companies, investors encourage slow, steady recovery.
While smaller investors won’t necessarily be able to take personal actions like large investment firms can, it’s good to know there are organizations like Principles for Responsible Investment (PRI) that help investors develop a coordinated response to crises like COVID-19.
We’re here for you
Looking at how much the world has changed in 2020, it’s easy to grow discouraged or worried about your investments. But it’s also good to see what investment managers are thinking about, and how they are planning for a steady recovery.
It’s much easier to feel calm and confident during times of uncertainty if you have a financial plan and understand how it’s going to help you reach your goals. Contact us here to reach out to a Bankers Life investment professional to review your portfolio today.
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1Jeremy Siegel. “Total Return Index.” Stocks for the Long Run, 1994