"My shares have fallen 30% what should I do?" "Is this a good time to invest in the stock market?"

To save people reading through lots of posts in different threads, I am going to summarise my views and the contrary view in this thread.

There are two camps

Camp 1 believes that you cannot time the market. In other words, it's not possible to identify whether the market is overvalued or undervalued.

However, history has shown that the stock market has outperformed other markets including bonds and cash and there is no reason to believe that this will change.

If you cash out now, there is a real risk that you will miss out on the market recovery when it does happen.

I belong firmly to Camp 1 as do most professional investment managers and investment advisors.

So you should not sell out now. If you have cash and you can handle stock market volatility, you should buy a diversified portfolio of shares either directly or through a fund.

Camp 2 is comprised of individuals who believe that they can predict the future and that the market will drop further and the recent falls are only the start of the problem. They also believe that they will be able to identify when it's right to buy back in to the stock market.

The problem with this is that study after study shows that there is no evidence that anyone can do this consistently. Individual posters will tell you that they saw this coming and sold all their shares 6 months ago and they will buy in again "when the time is right". Personally, I would put no weight on those claims.

Camp 3 - The Duke's Camp

Camp 3 is similar to Camp 1 in that it does not claim to know what will happen in the future. However, the past is no longer a useful guide as we are in uncharted territory. The Coronavirus is a new phenomenon as is the extent of Quantitative Easing.

History might not repeat itself under these circumstances.

So while Camp 3 does not attempt to forecast the market, the level of risk outweighs the potential gain.

Applying this to your personal financial situation.

If you have a pension fund, your investment horizon is long-term and you should not switch it to cash or bonds.

If you have cash, but you also have a mortgage or other borrowing, you should pay off these borrowings before investing in the stock market.

If you are invested in the stock market and you will need the money in the near future, then it's a very difficult question.

For example, if you are in the market to buy a property and the deposit is invested in the stock market, then you will probably need to sell enough shares to make sure that you can go ahead. Of course, if you are about to buy a house, you should not be invested in the stock market in the first place.

If you are saving up to buy a house in 5 years, then that should be a long enough time frame to remain invested in the stock market.

To be completed

Brendan,

In relation to Camp 2, i think those individuals do not claim to predict the future as you say. What they are doing is applying probability. So if they anticipare the market will fall further based on real world events this isnt predicting the future. This is applying logic based on current events that are unfolding.

Genuinely curious in posing the question - is it not possible to take action to protect ones fund ie move to cash if mkt has fallen and you belive it was fall further.

Then buy bk in when you believe it will rise.

Obviously this is timing but why is this strategy so derided if the investor themselves is confident, in as far as one can, be that the mkt is either rising or falling at a given point in time? Of course they may get timing wrong and loose out but they may also protect their fund

Can I suggest a Camp 3. Clearly the market sentiment is currently almost entirely driven by the Corona Virus thing. So nearly all conventional evaluation processes are out the window. The only question that matters is how will CV play out both in medical terms but also in terms of how governments and the populace behave in the face of the threat. The signs are that globally we will try to err on the safe side and the economic implications seem to be taking a back seat.

Even the medics cannot predict this. So everyone is almost equally well (or badly) placed to get a sense of the possibilities. From what I read the range of possible outcomes is very wide indeed. It is not off the radar that we will see a complete meltdown in stockmarkets. After all, if global economic activity is set back 50 years won't the markets follow?

The most one can say on the plus side is that it would seem that it will be some time yet before we can say we have got over this thing and it is hard to see the stockmarket upside to be any more than clawing back recent losses.

So in my Camp 3 I see staying with or entering the current market as a hugely risky prospect in "utility" terms.

Recent events simply illustrate the importance of having a well thought out investment plan and sticking to it.

If I have a decent time horizon, then I should take that money and invest it in a diversified portfolio of shares.

Yes, Covid 19 might appear or the US might attack North Korea, but my crutch is my time horizon.

Stock markets do very well over time but they are volatile; I fully expect my investments to do well over time, and by well I mean 6-8% on average over the next 50 years. But what I can guarantee is that the ride won’t be linear; it’ll be +30%, +6%, -25%, +4% and so on and so forth. If it was easy, everyone would do it and those good returns just wouldn’t be there.

But the salient point is that in times like this you do not sell and turn a temporary loss into a permanent one; if your time-horizon is still decent (i.e. 5+ years) and you’re diversified, stay the course. Wealth is created and preserved by time in the market, not timing the market.

Brendan, the above post 1 is a very biased summary of those who dont agree with you.

Brendan Burgess said:

Camp 2 is comprised of individuals who believe that they can predict the future

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So basically anyone who disagrees with you is claiming supernatural powers. That's not discussion Brendan thats just slagging people off.

Duke of Marmalade said:

Clearly the market sentiment is currently almost entirely driven by the Corona Virus thing. So nearly all conventional evaluation processes are out the window.

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Exactly, so the usual pricing mechanism is not working as well as usual.

Markets price shares efficiently when lots of informed, willing buyers and sellers are present.

Right now no one is an informed buyer or seller.

The S&P 500 turned on 15th February exactly one month ago. The corona virus has a long time to run.

cremeegg said:

Brendan, the above post 1 is a very biased summary of those who dont agree with you.

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What?

I introduce the thread as a summary of my views and the alternative views.

There are plenty of people here who believe that they can predict the future.

Duke has suggested a 3rd Camp. When I get my head around it I will include that in the summary.

Brendan

Staying the course is ok but surely taking action at times, esp if you hold strong views and have some knowledge, makes sense for at lease some investors.

If one anticipates further drops they should sell. How can anyone argue with this?

jim said:

If one anticipates further drops they should sell. How can anyone argue with this?

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If one anticipates further increases they should buy. How can anyone argue against this?

It's illogical and yet both perspectives are valid. It's likely this extreme volatility, with wild swings in both directions, will continue for a while.
There is no wrong or right so do whatever you wish that makes you sleep better.

Fidgety said:

If one anticipates further increases they should buy. How can anyone argue against this?

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Well, yes. This is my point. There may be ups and downs from day to day but over the next few weeks i think the mkt will be down, based on strong evidence we see every day ign news. So how can one say "stay the course", do nothing, let your funds drop. This seems lazy and stupid. What am i missing? The strong concensus seems to be contrary to my thinking.

Of course then when the mkt is anticipated to rise, based on what we will see in the news for example virus being controlled then buy bsck in.

So rather that stay the course proactively manage your funds.

If you were happy riding the wave of the bull market but these big drops are causing you to reevaluate then you should really reevaluate two things: 1) your asset allocation strategy and 2) your risk tolerance - you've likely exceeded it

galway_blow_in said:

Only if they've exclusively invested in the U. S market

European markets are below 2007 levels

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I’m talking about someone who’s globally invested, where the US represents the bulk (50-60%).

Itchy said:

If you were happy riding the wave of the bull market but these big drops are causing you to reevaluate then you should really reevaluate two things: 1) your asset allocation strategy and 2) your risk tolerance - you've likely exceeded it

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The salient point is that if the current volatility is causing you to think about abandoning your investment plan, the investment plan wasn’t appropriate in the first place.

It is now clear that the greatest bull run in history was as a result of being pumped full of steroids. It left the markets' immune system in shreds. And all the doctors can do is to pump in more steroids - but is this just delaying the melt down?

JSnowWinterfell said:

my gut feeling is that until we see the cases in the US stop increasing the markets will not calm.

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Agreed.

The market reaction so far is just emotional, and will continue to be until the spread is under control in the US.

Rational analysis of the medium term economic impact will not reach the markets for some time.

Markets are not down now because investors have made careful calculations about future economic prospects, they are down because trades are scared.

Are traders as scared now as they are going to be in a week, in a month, in two months.

Itchy said:

Is this the case? I'm not so sure. Ample credit, liquidity, factors of production etc. There will be causalities but a supply side problem?

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Large sectors of the economy are forcibly shut. Most of them will re-open when this passes, but some won't.

Also, workers that would have been hired won't be hired, and not all laid-off workers will be taken back on again.

This will have a supply-side impact.

Looking back at this thread it strikes me that a lot of posters are taking rather extreme positions.

It's either -

Go to 100% cash, now! We're doomed. Doomed!

Or -

Go to 100% equities, now! Stocks are on sale - fill your boots!

There is obviously plenty of ground in between these polar opposites.

In my opinion, most people that are within a couple of years of retirement should have a portfolio that is broadly balanced between equities and cash/bonds.

And then just accept whatever the market returns.

And they wouldn’t go far wrong. You’d probably be equally okay replacing the bond portion with cash and State Savings given the volatility of bonds in recent years.

I was on a webinar last night regarding the impact on the market of the coronavirus. Quelle surprise, the recommendation was to "stay the course"!

Indeed, I am unaware of any respected financial commentator who has publicly recommended "not staying the course". [I am not saying there are none - just that I haven't seen any such commentaries.]

I can understand why they would say this because it's hard to time the market and in the past, this was the right thing to do. To do otherwise puts such commentators at odds with their peers and history - it also requires them to say that "this time it's different." The thing is to become a respected financially commentator, you've probably spent a lot of time ridiculing the "this time it's different" brigade.

When the markets were down about 15% and the extent of this issue was becoming clear, I seriously question whether "staying the course" was the right advice at that stage.

Is it reasonable to believe that the market is wrong at certain points?