5 Investment Lessons to Learn from the COVID-19 Market Crash

Published May 18th, 2020 - 09:00 GMT
5 Investment Lessons to Learn from the COVID-19 Market Crash
When the outlook for the world economy is uncertain, there is underlying strength in investments underpinned by long-term contracts with organisations that are guaranteed to pay the bills. (Shutterstock)
Highlights
But as investors, we have lessons to learn – about how stock markets and assets react under extreme stress, and how we should construct our portfolios to be more resilient in the future as well as providing the investment growth we all crave. 

When it comes to the Covid-19 pandemic, every day is a school day – and that isn't just because many parents (myself included) are having to teach our children about fronted adverbials at the same time as working from home. 

As we scan the news for information, we are all learning a great deal about how viruses behave, on disease control and how scientists search for new drugs. 

But as investors, we have lessons to learn – about how stock markets and assets react under extreme stress, and how we should construct our portfolios to be more resilient in the future as well as providing the investment growth we all crave. 

We asked experts for key investment lessons that can be learned. If we take them on board, we could come out of lockdown with better money-making skills – as well as knowing how to bake a sourdough loaf and sew a facemask. 

Lesson 1: Tech stocks aren't the biggest risk

Investors old enough to remember the 2000 dotcom boom and the biggest casualties from the 2008 global financial crisis have an inherent belief that technology equals risk. 

But as stock markets plunged around the globe due to Covid-19, tech stocks remained some of the stars of the show. 'One important lesson from the pandemic has been that technology stocks are not necessarily the riskiest part of the market during a downturn,' says Annabel Brodie-Smith, communications director for the Association of Investment Companies. 

She adds: 'Shares in household names such as Apple, Facebook and Google have performed relatively strongly, highlighting the more central role their products and services are playing in our lives.' 

Brodie-Smith points out the strong performance of investment companies Allianz Technology and Polar Capital Technology, up 32.3 per cent and 42.5 per cent this year respectively, as an illustration. 

She says: 'While there's no knowing what the future holds, it may be that habits formed during lockdown – such as holding more meetings remotely – will continue after life returns to normal, further boosting the tech sector.' 

Allianz Technology has Microsoft and Amazon as its two biggest holdings, followed by cyber security group Crowdstrike. 

Polar Capital Technology holds Microsoft, Google parent company Alphabet, and Apple as its top three stocks. 

Lesson 2: Bonds aren't too boring  

Before Covid-19, it was easy to dismiss the benefits of bonds as part of an investment strategy. 

A ten-year bull market in equities meant their performance seemed a lag on many portfolios, but the recent behaviour of the stock market shows their importance. 

'Apart from cash, government bonds and corporate bonds were the only global asset classes in positive territory in the first quarter of this year,' says Dzmitry Lipski, head of fund research at wealth manager Interactive Investor.

'What this teaches us from an investment perspective is that while there are few places to hide when the global economic system takes a hit, portfolio diversification is absolutely crucial – by both geography and by asset class.' 

Lipski says that both multi-asset investment funds and some investment trusts can help ensure your portfolio has exposure to both bonds and equities. 

He adds: 'The Vanguard LifeStrategy 80 per cent Equity Fund has been excellent and is a low-cost global one-stop shop for those wanting global equity exposure with a decent chunk of high quality bond exposure too. 'It's suitable for both first-time and experienced investors.' 

For those more wedded to bonds, Vanguard also has a 60 per cent equity product. The 80 per cent LifeStrategy Fund is up 0.8 per cent this year and 40.4 per cent over five years. It has a mix of holdings in other Vanguard funds to create a multi-asset profile. Its top holding is a FTSE AllShare Index-tracking fund and its bond holdings include UK gilts and index-linked gilts as well as corporate bonds.

The FTSE 100 has joined other major stock markets around the world in bouncing off its lows

The FTSE 100 has joined other major stock markets around the world in bouncing off its lows

Lesson 3: Fear can be the enemy of growing wealth  

It is a well-known cliche that markets are driven by fear and greed. Veteran investor Warren Buffett says the secret of success is to be greedy when others are fearful and fearful when others are greedy. 

The sharp falls, and similarly sharp recoveries on the stock market during the pandemic, have borne out Buffett's wisdom.

James Norton, senior investment planner at Vanguard, says the trajectory of world stock markets in recent months has shown little mercy to those who are fearful. He explains: 'When things go wrong, our emotions take over and fear sets in. It's a survival instinct and we are programmed to take action. For example, if the boiler in our house breaks, we call the plumber, the boiler is fixed and we move on.

'When stock markets fall, the same instincts are triggered. We are losing money and want to stop the losses. For many, the first thought is to sell up and move into cash. 

'Selling an investment portfolio is likely to provide instant gratification. We feel better that we've stemmed the losses and maintained what's left of our hard-earned investment. But it's nearly always the wrong thing to do.'

Michelle Pearce Burke is cofounder and chief investment officer of wealth manager Wealthify. She agrees with Norton. 

She says: 'While some stock markets fell by over 30 per cent earlier this year, many recovered some lost ground very quickly. So investors who held their nerve by remaining invested, or even adding money, have done better than those who withdrew at the height of the panic, crystallising losses.'

Is the Fomo rally the real deal or will shares dive again?

It’s been called the Fomo rally, as shares picked themselves up off the floor and bear markets turned bullish. 

So, what’s going on? Is this the stock market signalling the start of a coronavirus recovery, or have investors merely been piling in driven by Fomo – the fear of missing out?

On this podcast, we look at the rally, what’s driving it and the history of false dawns in stock market crashes. 

Lesson 4: Check dividend cover to protect income  

Many investors are attracted by a company's dividend and in particular the dividend yield – the amount of annual income you get per share, expressed as a percentage of its price. 

The higher the yield, the more attractive the dividend income appears. Yet, as recent widespread dividend cuts have shown, the dividend yield shouldn't be taken as a stand-alone measure of a company's income-friendliness. 

What is more important is the robustness of the dividend – its so-called dividend cover. 

For example, Shell was the highest yielding oil stock in the world back in March at more than 11 per cent, but its dividend cover was equivalent to just over one times its annual earnings.

In simple terms, this meant that almost everything the company generated in revenues went into paying its dividends. This was an unsustainable position that led to Shell cutting its dividend for the first time since the Second World War. 

Other companies in a similar poor dividend state – dubbed members of the 'dividend danger zone' by wealth manager AJ Bell even before the pandemic – include housebuilder Persimmon, which has also postponed its dividend. 

Weak dividend cover is not always a guarantee of a company cutting or suspending its dividend. For example, mobile phone giant Vodafone announced a few days ago it was holding its dividend despite having low dividend cover. 

But it should be seen as a warning sign. You can check the dividend cover for a specific company by visiting its shareholder website. It should provide details of the firm's key financial information including dividends and when they will be paid. 

Dividing the total dividend per share by the earnings per share should give you the dividend cover figure. 

For those wanting an investment fund that picks dividend winners, Adrian Lowcock, of fund platform Willis Owen, suggests Trojan Income, which is down 4.8 per cent this year but up 16.2 per cent over five years. 

He says: 'Manager Francis Brooke takes a conservative approach to investing with a focus on capital preservation. He looks for companies that can produce a steady, long-term income along with capital growth.'

Lesson 5: Look for big government deals  

When the outlook for the world economy is uncertain, there is underlying strength in investments underpinned by long-term contracts with organisations that are guaranteed to pay the bills. 

The investment performance of infrastructure and social housing funds in the current crisis illustrates this, according to Monica Tepes, head of investment companies research at corporate adviser finnCap. 

She says: 'If you are looking for as much certainty as possible that your dividends won't be cut, you need to look at investment sectors where either the local or state government is a counterparty, or your payments come from businesses unaffected or even benefiting from the current environment.'

Infrastructure equity, infrastructure debt and social and supported housing investments are examples of businesses with strong counterparties. 

For example, Civitas Social Housing is a real estate investment trust that distributes 90 per cent of its profits from social housing rent as dividends. Its customers are not the tenants, but local authorities and housing associations. 

Its shares are up 24 per cent over a year, although investors must be aware that housing associations are not immune to financial risk. Sequoia Economic Infrastructure Income lends to big infrastructure projects. 

Shares are down nearly 3 per cent over a year, but up 30 per cent over five. Many of its investments – for example ferries and transport – are under short-term pressure from coronavirus, but should come through the other end of the economic crisis.


© Associated Newspapers Ltd.

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