Harbour Wealth – 27 March 2020 Client Update:
We write this update after our country has embarked on a 21day lockdown to try flatten the curve of the Corona virus (COVID–19). This is a situation we have never experienced before and hopefully will never again, but it is necessary to save lives and prevent further infection by this insidious virus. We commend our President and government for their swift action and bold leadership. The impact of this shutdown on people lives and finances will be dramatic, and we cannot emphasize enough how important financial planning is before and during these difficult and uncertain times. Below we provide some financial planning guidance during this time and after. Where do markets stand as of 25 March 2020? Massive stimulus packages are being brought by governments around the world and markets are taking an encouraging stance, although still very volatile. Just as we’ve seen huge drops in the past few weeks, so we’ve seen some huge spikes up in the past few days. This volatility certainly isn’t over by any means, as markets scramble try to find equilibrium.
|Index||Month to Date||Year to Date||1 year|
|SA Listed Property||-48.1%||-49.7%||-52.9%|
|R186 Govt Bond||-29.7%||-25.9%||-19.5%|
|MSCI World Index||-23.8%||-24.3%||-14.7%|
|Brent Crude Oil||-52.1%||-59.0%||-59.4%|
|US 10yr Treasury||43.4%||55.2%||64.0%|
Navigating A Black Swan Event
The world has become accustomed to the term “Black Swan Event”. When the English first arrived in Australia, they believed that all swans were white. The swan is a Royal bird, and in the 15th century, it was a sign of wealth to own a swan. The status quo had been temporarily up ended, even though Black Swans had always existed. These events, such as the current Covid-19 pandemic, always take on a different form. Whether it was 9/11, the Tech-bubble or the Sub-Prime banking crisis in 2008. The reality however is that market volatility is one of the most reliable things that one can predict.
Earthquakes & Engineering
It is unlikely that the engineers of the Golden Gate bridge in San Francisco in 1933, could replicate the forces and effect of an earthquake before it’s completion. Recent tests have shown that the bridge could still withstand an earthquake measuring over 8 on Richter scale. Much like the engineers of the Golden Gate bridge, Harbour Wealth could not have stress tested our process for Covid-19, but we didn’t need to. Whilst each “black swan” event takes on a completely different form, the resultant market (human) reaction is always the same and predictive.
The performance summary above, shows the significant short-term effect that this pandemic has had on growth assets globally. Only Gold and US Treasury’s, the classic safe havens, have shown strong positive gains. The Harbour Wealth planning process is engineered to withstand exactly this type of market shock. Immediate needs, such as capital or income required within next 2 years, will always be housed in safe-haven assets, regardless of a position of global markets. Adhering to this investment process means that our client’s growth assets have no short-term requirements to provide, avoiding the need to sell any of these assets at a loss, to meet capital or income requirements.
This is truly the best thing that anyone can do, particularly when protected by our investment process. Selling any growth asset now merely cements the loss. Growth assets are also the fastest to recover, as can be seen in the chart below, that details the S&P500’s performance in the year’s following major market crashes over the last 60 years:
The final graph underpins the call to stay invested. If the investor had remained fully invested for 30 years on the S&P 500 (US stock exchange), they would have generated a return of 348% (USD). If the same investor had “missed out” on just 1% of the best days in the market, their return would have been a loss of 73%!