Time Is Your Friend – Use It To Your Advantage
Most investors’ true investment horizons are far longer than the next few months.
“Please fasten your seatbelt as we are encountering some turbulence,” is the unpleasant voice of the pilot’s warning during your flight (even if flying is becoming a distant memory). No matter how uncomfortable and violent the turbulence, no passenger seriously thinks of leaving the plane at that moment. Everyone sticks with their initial decision which was:
1. To stay in the plane until it lands safely at its destination.
2. To trust the pilot and air traffic controller to neutralise effectively the impact of the turbulence…
We think this flight analogy plays well with the current market situation. The global spread of the Coronavirus and the lack of OPEC agreement on oil created unprecedented pockets of turbulences in the investor’s flight. These factors generated the fastest bear market in the history of the S&P 500, showing how severe the air pocket drop has been. But, just like the flight passengers who do not jump off the plane during the turbulence, investors should also stay the course with their pre-defined investment strategy, in line with their time horizon. More importantly, investors should not lose sight of the fact that their investment strategy is built with a specific time horizon in mind. Judging its success using much shorter term data is unlikely to be helpful.
In this note, we show how ‘time’ combined with a disciplined process are amongst the most important risk management tools left for investors to navigate the crisis effectively. Time is your friend, so use it to your advantage.
The Coronavirus Situation
The unknowns surrounding the global Coronavirus pandemic have created many concerns and uncertainties for us all. Since it is new, epidemiologists, biologists and doctors are working tirelessly to understand the basic mechanics of the virus and how it can be stopped. We still don’t know when the number of new cases and associated deaths will peak globally.
The worst of the virus will likely be behind us a year from now.
What we seem to know at present is that:
– Strict containment measures can successfully decrease the number of new cases each day (as in China, Hong Kong, and South Korea).
– A vaccine generally takes twelve to eighteen months to be developed.
– If the search for a vaccine for the Coronavirus fails, a population may become autoimmune if and when a certain percentage of the population contracts the virus (assuming that it doesn’t mutate over time). It’s difficult to assess with certainty when this herd-immunisation could occur though.
These known facts are not particularly reassuring. But they all have in common the time factor: the worst of the virus will likely be behind us a year from now. The extreme measures of travel bans, country or city lockdowns, and quarantine will be over and life as we knew it before the outbreak will have largely returned. As hard as it might be today, this suggests that investors should project their thoughts to beyond the worst of the virus outbreak to define their investment strategy today.