In a Market Crash, Ignorance is Bliss

Editor's Views: Financial advisers don't have to tell clients when their investments have soared, so why must they do it when they've tanked?

Holly Black 20 March, 2020 | 10:04AM
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There’s an EU rule that says financial advisers have to write to their clients if the value of their investments falls by 10% or more in a quarterly period. I think we are seeing now what a ridiculous rule this is.

The idea is a noble one and, yes, if we trust our life savings to a company or individual to manage then we should expect regular updates on how they are doing. But writing to clients at times of crisis can surely do no good.

Many people in this industry try to encourage investors to look to the long-term: ignore the market noise, don’t sell at the bottom, keep focused on your long-term goals. Frankly, I’m a bit of a bore when it comes to these mantras.

But I can only imagine that a letter landing on the front doormat or an email popping into your inbox out of the blue, saying your investments have plunged 10% is going to achieve the exact opposite.

As humans, we feel compelled to do something at times of panic or uncertainty. It’s why thousands of people are stocking up on a decade’s supply of toilet roll right now, I imagine. And it’s also why thousands of investors will be contemplating hitting the “sell” button on their portfolio as they receive these letters, log into their accounts and are greeted by a sea of red numbers.

Let’s not forget that for the past 10 years investors have enjoyed an unprecedented bull run. Global stock markets have hit record high after record high, and many a fund has shot the lights out.

Unfortunately, there is no piece of regulation imploring wealth managers to let their clients know when the size of their pension pot has doubled. Surely doing so might encourage people to save more – and to realise that a subsequent fall might not be as catastrophic as they might fear.

Suspending May be the Right Decision

This week saw a wave of property funds suspend trading and, such was the turmoil on the stock market, it was almost by the by. 

Interestingly, these suspensions are not like previous ones, which have been driven by an increase in investor redemptions (if lots of investors try to sell at once, a fund manager is forced into a firesale of the buildings the fund owns). This time, it's because the independent companies which value the properties owned by the fund can't put a price on the assets at the moment. 

It stands to reason that if prices on the stock market are swinging wildly every day, making it hard to properly price shares, then valuing a building is going to be even harder. Funds that own shopping malls and retail assets may be particularly vulnerable in the current environment when everyone is staying home; by the time the panic has eased there could be an awful lot of empty units on the high street. 

Is suspending trading the right thing to do? Equity funds haven't done the same even though they're enduring the same turbulence. Obviously I believe that people have the right to access their money whenever they like and if you want to sell, sell. But suspending trading could stop a lot of bad panic-led investment decisions. 

Some Shares Are Soaring!

At times when everything seems to be in freefall I find it fascinating to find the companies that are on the up. On Thursday, for example, I noticed that shares in a firm I had never heard of – Elementis – were up an incredible 145% at one point (oh, to have a time machine at these moments). The business specialises in chemicals and personal care products, perhaps that’s a clue to its success at a time when people are stocking up on hand sanitiser like it’s going out of fashion (if it ever was in fashion).

On the same day, BATM Communications (BVC), an Israeli telecoms company, was up 47% and peer-to-peer business loan provider Funding Circle (FCH) 46%.

The way the world is working has changed dramatically even in just the past few days and there is much to be concerned about, but it’s worth remembering there will always be winners as well as losers.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk