An extreme example is shown below. This illustration reflects a hypothetical investor selling out at the very bottom of the Global Financial Crisis, then remaining either un-invested completely, or waiting exactly one year to re-invest, thereby missing the rebound when it came.
This is an example only and the result may be substantially different if the investor had sold before the bottom or reinvested earlier, or both.
Everything but the kitchen sink
Globally, governments and central banks have thrown huge levels of support at this unfolding financial crisis— slashing cash rates, injecting considerable liquidity into markets and delivering multi-billion dollar fiscal packages.
We are only just seeing signs that these moves are starting to settle currently held investor fears, as the continuing spread of COVID-19 is all-pervading. With no end date in sight for the pandemic, this has added to market anxiety.
With several countries now taking aggressive social distancing measures, it is expected that the infection rate will start to decrease and eventually be contained; this should help markets to recover. We have already seen infection rates ease in China and South Korea. According to the World Health Organisation (WHO) and based on the number of new cases recorded, Europe and the US now appear most vulnerable.
This is the first time a disease outbreak has triggered this extreme level of market volatility that surpassed the level seen during the global financial crisis. While accommodative monetary policy has been effective in the past, lower interest rates and other measures to boost consumer spending might not help as much when consumers are quarantined at home. Additionally, interest rates are already extremely low, and in some cases negative, reducing the capacity of central banks to make an effective monetary policy response.
At the moment, there is a sense around the world that the worst is yet to come. Whether this is true or not, consumers are fearful of the impact of the virus on their lives and loved ones, and the economic fallout to follow. These fears may continue to push markets down for the time being.
But those who are invested for the long term may do well to stay calm and avoid rash decisions. The true impact of this virus will only be known for certain well after it has passed.