During the current coronavirus outbreak, what are the best trading strategies for retirement funds? What has changed since pre-COVID-19?
The world as we know it has changed recently beyond anything we may have witnessed before thanks to the preventative measures drafted by governments worldwide.
As a result, stock markets have fallen in response to the impact on the global economy.
Whilst investors will understandably be worried by the speed and magnitude of the falls, they should resist the urge to trade reactively. The global economy and markets will recover from this, that is certain.
Nobody knows when this will be and therefore, as tempting as it might be, investors should try to avoid speculation or hasty trading based on fear. Investment funds which are part of a long-term retirement plan will, in time, recover in value too.
Investors should also remember that not all profiles have fallen in value. At times like this, government bonds typically act as safe haven assets and are bought by those investors selling higher risk assets such as equities. Therefore, the impact of the recent market falls on their own investment funds may not be as bad as they first feared.
For instance, a sensibly diversified portfolio that is 60% invested in shares and 40% invested in government bonds might be down around 15% whereas global stock markets have fallen by 25%.
Investors who hold a balanced portfolio investing in shares and bonds should look at the balance of their portfolios between the asset classes and consider ‘rebalancing’.
Rebalancing allows you to take the profit from the asset class which has done well, a current example would be bonds, and reinvest these funds into the asset class that has fallen in value, being shares. This is often counterintuitive and demands a strong stomach. However, for those that engage in rebalancing, it allows reinvestment into shares, which over the long-term should provide higher returns than bonds and will overall improve a portfolio’s long-term return potential.