OPINION: In my investing career I can remember five major events where fear and panic smashed financial markets – the 1997 Asian financial crisis, the September 11 terror attacks in 2001, Sars in 2003, the 2008 global financial crisis, and now coronavirus.
The fact that there has been a 12-year gap between the global financial crisis (GFC) and now is worth noting.
In hindsight we have been in a benign period for financial markets, supported by interest rates going down over a long time.
It’s led to high house prices, high share prices and plenty of high fives for investors.
What will happen now? Who knows. Trading the direction of financial markets is a fools game, with the chances of winning on a par with gambling.
But experience has taught me two things in a crisis. One is to be careful about what you hear from experts, the other is to divorce emotions from rationality. Both are extremely hard to do, but the right thing nevertheless.
These lessons were best exemplified while working in Hong Kong through the Sars epidemic. It’s useful to be right in the epicentre of a panic, it’s a great learning experience.
During Sars, I vividly remember hearing from medical experts, via the media and in government sponsored press conferences, that it was more contagious than anything seen before, more lethal and very difficult to contain. That week I was on my last work flight for weeks, on a huge aircraft with more crew on board than passengers. It was scary.
The first lesson I learned from Sars (and every other dramatic market meltdown) is to be careful of expert opinions. In this case, it doesn’t mean you shouldn’t listen to your doctor. No doubt washing hands, avoid unnecessary contact with others is all sensible advice.
But in hindsight, Sars taught me that there was no upside for professionals in downplaying the risk. There was almost a race to the most dramatic scenarios, with politicians the most susceptible to hyperbole.
It may have been the right thing to do regarding containment, and perhaps that’s the playbook to mobilise the public. But the dire predictions back then, nearly all of which came to nothing, makes me wary when I hear some of the doomsday scenarios now.
And there is a problem with socialising doomsday scenarios to contain the virus, intentionally or unintentionally.
The financial markets have a hair trigger for any actions that will lead to company collapses, default on debt and financial meltdowns. These things cause people to lose their jobs, and their retirement nest eggs.
Simplicity chief executive Sam Stubbs says he learned from Sars to be careful of expert opinions.
And, as always, it’s the most vulnerable who suffer. Many can work from home, but many just can’t.
So what experts and politicians say isn’t just medically important, it has huge financial ramifications for ordinary New Zealanders too.
With Sars, three months later it was all effectively over. Predictions during the crisis were for a long economic hangover, which didn’t happen.
During the much more severe Asian financial crisis, predictions were that local markets would take over a decade to recover. It took time for sure, but six years later they were at new highs. And we all know what happened after the GFC.
“Hindsight should show that those who carry on investing now will find they bought investments at sale prices,” says Sam Stubbs.
The other lesson I’ve learned is to divorce emotions from rationality. This is very hard, because fear is a powerful and contagious motivator.
We have fear because it protects us in times of danger. Biologically it prepares us for imminent attack or danger, and possible death. So burying that emotion in logic and rational analysis is literally fighting nature.
And when it comes to financial markets, fear manifests itself swiftly and savagely, as we’re seeing right now.
But with financial markets and well diversified investments (as in a KiwiSaver fund), death will not happen. Our funds will not go to zero. So fear is a short term thing.
Even in the worst case for the Covid-19 coronavirus, presumably the vast majority of us will live, and have immunity or a vaccine in one or two years. Life will go on for nearly all of us, and we will still need our investments to live off.
And we may be in for a recession, but they too end.
Hindsight should show that those who carry on investing now will find they bought investments at sale prices. It’s called dollar cost averaging, and it’s one of the most powerful investment tools available to anyone.
So long term investors should keep their contributions into Kiwisaver and investments going, as brave as that feels right now.
It’s hard making long term rational decisions in an environment of short term fear and panic. But after five market meltdowns in my career, I’ve learned a healthy scepticism for dire predictions and to park the fear.
And so while the markets act like Chicken Little, running around like the sky’s falling in, be the fox. We know who wins in the end.
* Sam Stubbs is the chief executive of not-for-profit KiwiSaver, Simplicity.