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RP: The coronavirus pandemic has taught people all sorts of lessons.
And there are important takeaways for investors as well.
For one thing, however bleak things seem, you mustn’t panic.
Joachim Klement is an investment strategist, based in London.
JK: I think in this crisis, just like in any other crisis, the investors that have done best are the ones who didn’t panic, that didn’t try to sell in a panic in March, when everything seemed to end, including the world.
Those that have stuck to their guns, remained long term investors, they have actually benefited from the recovery that we have seen since late March, which so far nobody has really expected.
RP: As Joachim says, the stock market rebound took many investors by surprise, given the dire economic forecasts at that time.
But this a common misunderstanding. The stock market and the economy are two very different things.
JK: If you compare the composition of the stock market it is very very different from actually the real economy. For example, consumer goods and retailers, shops et cetera, are about 15-20% of the real economy if you measure it as part of GDP. But it’s only about 10% of the British stock market. It’s even more extreme in the US, where more than 20% of the market cap are IT companies, where IT as a direct contribution to GDP is only about four or five per cent, so it’s a total mismatch between what is happening in the stock markets and what is really happening in the real economy.
RP: Most if not all investors have made a mistake at some point or other. The important thing is to see them as learning experiences, so you avoid making the same mistake again.
JK: There are two lessons that the average investor can learn, first of all the value of long term investing. To stick to an investment through the ups and downs. It’s really hard to do that in practice, especially if the world is going upside down, but there are some tips and tricks that you can do in order to create that discipline to stick with your investments into the long run.
The other lesson that an investor can learn from this crisis once again is that you shouldn’t necessarily trust the forecasts of experts because as we’ve seen time and again, especially in this crisis, the experts are often very, very wrong.
RP: We keep hearing how unprecedented the coronavirus crisis is. In some ways it is, but in others it’s not particularly out of the ordinary. There will always be uncertainty. No one knows the future.
The best approach is to be aware of the range of possible outcomes and invest accordingly.
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