Coronavirus: Should You Move Investments To Cash?

The COVID-19 pandemic has had a significant impact on the global economy, causing turmoil in financial markets and affecting the personal finances of workers worldwide. In such uncertain times, it is only natural for investors to consider moving their investments to cash to avoid potential losses. However, financial experts advise against making hasty decisions driven by fear and emotion. While cash deposits may provide a sense of security, historically, they have failed to keep up with inflation, resulting in a loss of purchasing power over time. On the other hand, equity markets have typically outperformed inflation over the long term, offering the potential for capital growth. Therefore, investors are encouraged to adopt a long-term perspective, understanding that market volatility is inherent but can also present opportunities.

The pros and cons of cashing out during a market crash

Cashing out during a market crash can be a tempting option for investors who are worried about losing money. However, there are both pros and cons to consider before making any hasty decisions. Here are some of the key points to keep in mind:

Pros of cashing out during a market crash:

• Preserving capital: If you believe that the market is going to continue declining, cashing out can help you preserve your capital and avoid further losses. This is especially relevant if you need the money in the short term.
• Reducing risk: Moving your investments to cash can provide a sense of security and reduce the risk associated with volatile markets. It may be a good option if you are risk-averse or approaching retirement.
• Taking a break: Cashing out can give you a break from the stress and anxiety of watching your portfolio fluctuate. It allows you to step back and re-evaluate your investment strategy without the pressure of daily market movements.

Cons of cashing out during a market crash:

• Missing out on recovery: Markets tend to recover unexpectedly and rapidly after a downturn. If you cash out, you may miss out on the gains that often follow market crashes. Historically, recoveries have been swift and significant.
• Losing to inflation: Cash deposits rarely keep up with inflation, so holding cash for an extended period is likely to result in a loss of purchasing power. Over time, the value of your cash holdings may decrease relative to the overall market and the cost of living.
• Difficult timing: It is challenging to time the market accurately. Those who cash out often miss the explosive, unexpected start of rallies and end up selling low and buying high. As a result, they may end up with lower returns than if they had remained invested.
• Long-term focus: Investing is typically a long-term endeavour. Short-term market fluctuations, including crashes, are expected within the context of a longer-term growth trajectory. By cashing out, you may disrupt your long-term investment strategy and hinder your ability to achieve your financial goals.

Ultimately, the decision to cash out during a market crash depends on your individual circumstances, risk tolerance, and investment horizon. It is essential to carefully consider the potential benefits and drawbacks before making any decisions regarding your investments. Consulting with a financial advisor can provide personalized guidance based on your specific situation.

The importance of a long-term investment focus

Don't panic

It can be tempting to cash in your investments when the market is volatile, but it's important to remember that investing is a long-term game. Making rash decisions based on short-term fluctuations can often do more harm than good. As Greg Klingler, CFP and ChFEBC director of wealth management for the Government Employees’ Benefit Association, advises: "Patience is truly a virtue when facing the ever-present volatility of the stock market."

History shows that markets recover

Market crashes and downturns have happened before and, historically, the markets have always recovered. For example, between January 1st, 2001, and December 31st, 2021, the S&P 500 had many ups and downs but still achieved an annualised growth rate of 9.52%. And that's despite the major crashes caused by the Financial Crisis of 2008 and the Coronavirus pandemic in 2020.

You might miss out on gains

If you move your investments to cash, you run the risk of missing out on the gains that come with a market recovery. For example, if you had missed the best 10 days of growth in the S&P 500 between January 1st, 2001, and December 31st, 2021, your annualised return would have been reduced from 9.52% to just 5.33%. That's a significant difference and shows how important it is to stay invested for the long term.

Cash deposits often don't keep up with inflation

Historically, cash deposits have struggled to keep up with inflation, which means that holding cash over the long term can be a sure way of losing money in real terms. Even with the relatively high deposit returns currently available for some fixed-term cash bonds, you would still be losing money in real terms compared to inflation.

It's hard to time the market

It's extremely difficult to time the market correctly and investors rarely, if ever, get out of the market at the right time or get back in at the bottom. As Corey Clark, chief marketing officer of Dalbar, a financial services market research firm, says: "The short run is when investors make bad decisions about cashing out. That's when they're prone to sell too low and buy too high." So rather than trying to time the market, it's often better to simply stay invested for the long term.

How to manage your budget during the pandemic

The COVID-19 pandemic has had a significant impact on global health, communities, and economies, and it's understandable that you may be concerned about your investments and finances during this time. Here are some tips to help you manage your budget:

• Don't make impulsive decisions: It's important to avoid making impulsive decisions out of fear or panic. While it's tempting to make drastic changes when the market is volatile, a one-size-fits-all approach is likely to lead to regrets. Instead, seek advice from financial experts and consider your long-term financial goals.
• Focus on long-term investments: While it may be tempting to convert your investments into cash during a market downturn, especially if you're close to retirement, historical data suggests that markets tend to recover over time. Withdrawing your investments now may cause you to miss out on the recovery phase, potentially impacting your long-term returns.
• Diversify your portfolio: Consider diversifying your portfolio to balance risk and return. This could include a mix of short-term and long-term investments, as well as a combination of cash-type assets, short-duration bonds, and equity markets. This approach can provide stability and potentially reduce the impact of market volatility.
• Seek expert advice: Consult with financial advisors or experts to determine the best strategy for your specific situation. They can provide guidance on how to allocate your investments across different asset classes and help you make informed decisions based on your risk tolerance and financial goals.
• Monitor your expenses: During a pandemic, it's crucial to closely monitor your expenses and create a budget that aligns with your current financial situation. Identify areas where you can cut back on non-essential spending and focus on prioritizing essential needs and long-term financial goals.
• Build an emergency fund: It's important to have a cushion to fall back on during uncertain times. If possible, set aside a portion of your income into a savings account or emergency fund to cover unexpected expenses or financial setbacks. This can provide peace of mind and help you avoid dipping into your long-term investments.
• Stay informed: Stay updated with trusted sources of information about the pandemic's impact on the economy and financial markets. This can help you make more informed decisions about your investments and budget management.
• Focus on long-term financial health: While short-term market fluctuations can be concerning, it's important to keep a long-term perspective. Markets have historically recovered from crashes and downturns, and maintaining a long-term focus can help you avoid making impulsive decisions.
• Evaluate your risk tolerance: Assess your risk tolerance and adjust your investment strategy accordingly. If you're comfortable with a higher level of risk, you may consider investing in equity markets, which have historically outperformed inflation over the long term. However, if you prefer a more conservative approach, consider lower-risk options such as cash deposits or short-duration bonds.
• Prioritize essential expenses: During a pandemic, it's crucial to prioritize your essential expenses, such as housing, utilities, food, and healthcare. Ensure that you have sufficient funds to cover these basic needs before allocating money towards other areas.

Remember, everyone's financial situation is unique, and it's important to seek personalized advice from a qualified financial advisor who can provide guidance tailored to your specific circumstances.

The role of investors in supporting sustainable companies

Investors play a crucial role in driving the transition towards a more sustainable and responsible global economy. By allocating their capital to environmentally and socially responsible companies, investors can promote sustainable practices, foster innovation, and contribute to addressing pressing global challenges.

Understanding Sustainable Investing

Sustainable investing, also known as eco-friendly or green investing, involves directing capital towards companies, projects, or funds that prioritise environmental, social, and governance (ESG) factors alongside financial returns. This type of investing has gained prominence due to increasing awareness of environmental and social issues, regulatory changes, and evolving consumer preferences.

The Impact of Investors on Sustainability

Investors have significant influence over companies' behaviours and strategies. By investing in sustainable companies, investors send a strong signal that they value and support responsible business practices. This encourages companies to adopt more sustainable operations, reduce negative environmental impacts, and promote social responsibility.

Benefits of Supporting Sustainable Companies

Investors who support sustainable companies can contribute to a more resilient and prosperous future for several reasons:

• Long-term Financial Gains: Sustainable companies are often better positioned to mitigate risks, adapt to changing conditions, and benefit from innovative solutions. This can lead to stronger long-term financial performance, providing investors with potential financial gains.
• Addressing Global Challenges: By prioritising ESG factors, investors can help tackle issues such as climate change, resource scarcity, social inequality, and unethical corporate practices. This contributes to a more sustainable future for all.
• Risk Mitigation: Investing in sustainable companies can reduce portfolio risk. Sustainable companies are often more resilient due to their focus on environmental and social responsibility, which can enhance their ability to withstand market volatility and economic downturns.
• Positive Impact on Society: Supporting sustainable companies encourages the development and implementation of innovative solutions to global challenges. This fosters social responsibility, ethical practices, and a more inclusive economy.

Factors for Investors to Consider

When deciding whether to support sustainable companies, investors should consider the following:

• ESG Ratings: Analysing ESG ratings helps identify companies with strong environmental, social, and governance practices.
• Financial Performance: Evaluating financial statements, profitability, growth prospects, and industry trends is crucial for informed investment decisions.
• Greenwashing Risks: Investors should be cautious of misleading claims and seek independent information to avoid greenwashing tactics.
• Regulatory and Policy Implications: Monitoring relevant legislation, international agreements, and industry standards is essential to understanding potential impacts on investments.
• Diversification: Diversifying investments across industries and asset classes helps reduce risk and enhances potential returns.
• Balancing Financial Returns with Impact: Striking the right balance between financial performance and social and environmental impact is critical for long-term success.

In conclusion, investors have a pivotal role in supporting sustainable companies and driving positive change. By integrating sustainability into their investment strategies, investors can contribute to a more resilient and prosperous future while potentially benefiting from long-term financial gains.

The impact of coronavirus on the financial performance of companies

The COVID-19 pandemic has had a significant impact on the financial performance of companies across various sectors. While some industries have been severely affected, others have experienced positive outcomes. Here is an analysis of the impact on different sectors and suggestions for improving financial performance:

Technology Companies

Many large technology companies, including Microsoft, initially reported minimal impact on their earnings due to COVID-19. However, they anticipated potential future effects. Apple, for example, experienced a decrease of $4.7 billion in their FY20 Q2 earnings compared to previous guidance. Logitech also adjusted its profit outlook, expecting a reduction of $10 million in non-GAAP operating income. These adjustments highlight the uncertainty and challenges faced by technology companies during the pandemic.

Agri-Food Sector

The COVID-19 outbreak disrupted the agri-food supply chain, leading to closures of grocery stores, restaurants, and shopping malls. This resulted in a disruption in demand and supply and a negative impact on financial performance, especially for privately-owned companies in middle- and high-risk areas. However, state-owned companies in low-risk areas showed enhanced financial performance. Additionally, highly leveraged companies in the agri-food sector experienced a more significant negative impact on their cash holdings than low-leveraged companies.

Chinese Listed Firms

The COVID-19 outbreak negatively impacted the financial performance of Chinese listed firms, particularly in the first quarter of 2020. There was a significant decrease in the revenue growth rate, return on assets (ROA), return on equity (ROE), and asset turnover (ATO). However, the impact on ROA, ROE, and ATO was relatively modest, with only slight decreases. The medical industry in China experienced improved financial performance during the outbreak, while industries such as travel, entertainment, and airlines were negatively affected.

Suggestions for Improving Financial Performance

• Conservative Working Capital Management: Adopting a conservative working capital management approach can help reduce the negative financial impacts of COVID-19. Maintaining adequate liquidity and minimizing current assets can lower costs and improve profitability.
• Focus on Corporate Culture and Social Responsibility: Corporate culture and social responsibility (CSR) can play a moderating role in mitigating the negative effects of COVID-19 on financial performance. Companies with strong CC and CSR may experience reduced negative impacts.
• State Ownership: State-owned enterprises (SOEs) in China experienced less adverse effects on their financial performance compared to non-state-owned firms. The relationship between COVID-19 and state ownership is favorable, reducing the severity of the outbreak's impact.

Frequently asked questions