If you read the news, you will no doubt start feeling a sense of panic. Headlines such as “About $130 billion wiped off Australian shares” can really set fear in anyone’s heart especially if you are in retirement or close to retirement.
The drop is on the back of extraordinary growth that has made the world economy fragile and a lack of preparation for natural disasters and pandemics that can travel quickly thanks to cheap and accessible global travel. However, there is one reason for volatility and sell-off hardly anyone talks about- automated machine trades and algorithms.
Over the past few years, I noticed many of my friends who were in funds management left to work as program coders. Essentially they program very fast computers to do their bidding based on algorithms they create.
They are often paid well for this job. Fund managers and stockbrokers know if they are to remain competitively priced and have an edge, they need to be investing heavily in very fast, very powerful computers, coded by smart people with algorithms that seek to react quickly, and trade quickly to buy and sell on their behalf.
Those powerful machines analyse market sentiment such as news feeds and twitter feeds and trigger an automatic response. For example, if they detect negative news, they sell. They may also have another trigger such as “if the market drops by 1%, sell”. So you have a multiplier effect that has the potential to drive the market down, and sometimes substantially so.
In an article by CNN from 2018, a fund manager admits that Eighty per cent of the daily moves in U.S. stocks are machine-led. Imagine how many trillions of dollars are at the mercy of those machines.
Machines sometimes get it wrong when they misinterpret the news. In 2013 someone hacked one main news source and highlighted how stupid those machines can be. There was a Twitter Feed saying Obama was injured in White House explosions. One false twitter feed caused an entire index- Dow Jones to fall. The issue was fixed in a few minutes but the damage was done. So how did the reaction come so quick? Many experts blame this solely on machines not distinguishing what is right and wrong and simply triggering a sell.
Is there rational when machines are racing to the bottom? I doubt it. However, the real lesson is understanding how fragile our economies are to outbreaks and I sincerely hope this lesson will not be lost on lawmakers for years to come.
Personally, I am not making light of the coronavirus or the impact economic downturn has on all of is. I care for a family member who is at high risk. I pulled my son out of daycare and I am no longer seeing clients face to face. All this is putting a lot of pressure on my personal and business budget. But the reality is nothing lasts forever. China is already opening back up its main business hubs and major attractions such as Disney has reopened as cases slowed down and the disease was contained.
I hope you understand that panic selling is a bit like panic buying of toilet paper. You will realise how silly it is only after the fact. Woolworths was the first to decline refunds to the hoarders. Good.
However, there is something to take out of this that is of importance:
- Have enough safe and defensive assets in your portfolio that will see your pension payments funded.
- Use reputable fund managers who can react quickly and take advantage of the situation.
- We as a business:
- We avoid investing in direct stocks and we diversify across a broad range of quality fund managers that invest across quality assets to manage risks.
- We advocate and construct portfolios with enough defensive assets that can withstand very long periods of downturn, and you may even take advantage of the falls.
What to do if you are concerned?
If you are concerned a bit of reality helps. Please take a look at the graph below and you will find we are not doing so badly. You may track the index yourself with the link here.
I am also here to support you with decision making so please do call me on
1300 10 44 99 or email me on firstname.lastname@example.org
Some may even see this as an opportunity, so if you wish to take advantage of the down-turn, please also call me to discuss your options.
Certified Financial Planner (CFP®), Master of Disability Studies, B.Bus (Applied Finance, FP)
Managing Director of Health & Finance Integrated
a Director of the Financial Planning Association of Australia (FPA)
1300 10 44 99 m: 0408 414 497 d: 02 9158 3841
Level 3, Suite 2 96 Phillip Street, Parramatta NSW 2150
Health & Finance Integrated is a Corporate Authorised Representative of Australian Unity Personal Financial Services Limited (ABN 26 098 725 145) AFSL 234459, 271 Spring St, Melbourne VIC 3000 (AUPFS). Any advice in this document is general in nature and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial or legal advice relevant to your circumstances before making investment decisions. Neither AUPFS nor Health & Finance Integrated takes responsibility for, nor gives any endorsement or warranties in relation to any third-party information referred to herein.