The coronavirus has a hold on the financial markets for some time now. We see things happening on the markets that until recently seemed surrealistic. Think, for example, of the oil price which became negative. At the same time, it is important to keep a cool head. By means of four quotes we interpret the current market.
06 May 2020
Don’t push the panic button
Don't panic if markets fall sharply. Historically, stock markets have always bounced back to record highs. While it is impossible to know in advance how long it will take you to fully recover from a crash, if you’re in it for the long run, you will always end up on top.
Don't try to catch a falling knife
In case of a crash, the stock market rate, shown in a graph, goes down like a falling knife. As a buyer, it is important to wait until the storm dies down and the proverbial knife no longer 'falls'. At the same time, it is important for a potential seller to remain rational. Crashes often cause an overreaction, for example because other investors are obliged to sell the investments. So try not to follow the crowd to the exit but keep a cool head.
Less is more
Buying and selling investments costs money. This can manifest itself in the form of transaction costs, but during crashes market costs are increasingly important. In times of crisis, demand on the markets dries up, resulting in a relatively larger discrepancy between the buying and selling price (also known as 'spread'). For some instruments a situation might occur where there are hardly any buyers, as a result of which there will be a substantial discount on the intrinsic price at some point in time. It may be advisable to wait for quieter times.
"Risk comes from not knowing what you are doing." - Warren Buffett
For a good night's sleep, estimating the possible risks of a portfolio is no superfluous luxury. For example, how does my portfolio react to a 10% drop in stock markets? And to what extent is my portfolio at risk by a sudden downfall in for instance the oil price? As an institutional investor, you would like to know the answer to these questions in advance.
In order to get answers, it can be useful to apply scenario analyses. Because it is possible to make an estimate of how the instruments will react to certain market shocks, not only from a historical perspective but also on the basis of how they work, an initial insight can be given into the effects in the event of a possible crash. Forewarned is forearmed.
KAS BANK N.V. has been part of CACEIS since September 2019. CACEIS is a European specialist for the custody and administration of securities and high-quality risk and reporting services. We focus entirely on providing securities services to professional investors in the pensions and securities world. The acquisition of KAS BANK N.V. strengthens CACEIS' position in the Netherlands, Germany and the United Kingdom. Our combined product range makes us market leader in custody services and fund administration in Europe. CACEIS is part of Crédit Agricole, the world's largest cooperative financial institution.