Market Storms and The Importance of Diversification
Protection Wealth Updates RetirementAs investors work through the uncertain economic impact of the COVID-19 virus, we’ve continued to see volatile swings in equity markets. Amid the stream of headlines, the only thing anyone knows for sure is that the future is uncertain. Of course, an uncertain future is a feature of investing that applies at all points in time, not just when concerns about COVID-19 are capturing our attention.
Unfortunately, this uncertainty often scares investors away from markets or may even encourage them to try and time them. These actions undermine the key to long-term investment success: building well-diversified and resilient portfolios that can weather the storm, no matter what market environment we are in.
A Look Around The World
As it currently stands, over 80% of confirmed COVID-19 cases are situated in mainland China. Although the outbreak began to gain steam only in January, evidence of the damage done to its economy has already started to materialize. Satellite images show China emitted drastically less air pollution in February 2020, a clear indication that its manufacturing sector activity was considerably lower than usual.
With this backdrop, investors might expect Chinese equity markets to be significantly impacted by COVID-19 concerns over the past several months. However, China has in fact been one of the best performing markets over this period, and it topped the list of MSCI Emerging Markets country indices in February. What’s more, in looking at the performance of Chinese and U.S. equities over the course of 2020, we can glean a number of interesting insights.
- In China, the initial decline in stock prices was almost entirely reversed before a secondary correction began. Nonetheless, the most recent decline has been far less severe than that of developed markets and Chinese markets are now up 13% from their 2020 lows in light of their relative success in containing the virus.
- Outside of China, markets seemed to ignore the severity of the situation until it became clear that COVID-19 would not be contained regionally
Diversification: The Golden Rule of Investing
Through recent volatility, balanced portfolios have been aided by the benefits of diversification. Safe haven assets such as high-quality bonds have provided the portfolio insurance that we typically expect during risk-off environments. However, diversification goes beyond traditional asset classes. As the above charts show, investors can add the benefits of far greater diversification to their portfolio by investing globally. When one region is performing poorly, another could be enjoying stronger performance.
A well-diversified portfolio can lead to smoother, more consistent returns. These qualities can help stay the course and capture the benefits of investing for the long-term.
I also wanted to share the below link. It will redirect you to an article written by Doctor Abdu Sharkawy of the University of Toronto’s Division of Infectious Disease. This article is a doctor’s passionate post that warns mass panic about the virus could do more damage than the disease itself. It has been shared nearly one million times and we feel it puts this disease into perspective