A Turbulent Environment
Markets are somewhat unsettled right now. Rising inflation, rising interest rates, supply chain issues and the horrific invasion of Ukraine are combining to create a perfect storm that is causing almost every single asset class to drop.
Even the most battle-hardened of investors could be feeling squeamish and questioning their strategies right now.
In the moment, there’s no doubt that these market falls feel unpleasant. The good news is that markets have recovered from every single bear market in history and your financial plan is a long-term endeavour.
It’s crucial to maintain composure and to evaluate events in the context of the long-term rather than the moment. The best thing any of us can do is switch off the noise, hunker down and maintain a long-term outlook.
That’s easy to say, so here are a few thoughts on how to hold your nerve while all around seems to be pessimism and pain.
1. Maintain a long-term perspective
Stock market rises and falls are normal. They are part and parcel of the game and as an investor with a long-term horizon, you should expect to see this happen – it is the price you pay for positive expected growth over time.
Let’s remember, there have been some pretty momentous falls before. Since 1980, there have been something like 13 corrections (decline of 10% or more) and about eleven bear markets (decline of 20% of more). Events that were seen as cataclysmic at the time, now just appear as blips on a relentlessly rising graph.
The chart below shows the difference in return for investors who either pulled their money out or remained invested after the Global Financial Crisis:
Source: FE Analytics
We would see the same picture if we looked at the Dot Com crash in 2000, or even the Covid-19 pandemic, which reared its ugly head in early 2020.
The message here is that investors who stayed the course were rewarded, while those who panicked and went to cash locked in their losses. Historical evidence would suggest that getting out is a mistake. If you’re out of the market and it bounces, you may never get that loss back.
2. Threat or opportunity?
If we step back from short-term thinking, and instead look at the falling asset prices in the context of our long-term financial plan, the question shifts from ‘should we sell?’, to, now that stocks are cheaper, ‘is now a good time to buy now that equity markets are cheaper, and inflation is eating into savings sitting on deposit?’.
Diversification is the golden ticket in investing.
A portfolio that is spread across regions, sectors, countries, currencies and asset classes is far better protected than one that has everything staked on Lucky-7. This is because different asset classes behave in different ways to each other. Often, when one falls in value, another will rise, or fall by a lesser extent.
This wisdom might feel like a nonsense when all the markets are in freefall, but the money has to go somewhere, and even the money that is being taken out of the system by short-term emotion, will come back at some point.
With valuations fluctuating wildly, it is perfectly possible that the risk profile of your portfolio has moved out of line with its original objectives. If this is the case, then the portfolio should be re-assessed and rebalanced.
Any period of volatility creates opportunities to sell more expensive investments and invest in cheaper ones with more upside. Rebalancing is a way of systematically selling at higher prices and buying at lower ones. To do it is challenging as it requires acting against emotion and avoiding decisions that could radically alter your investment strategy without you realising it.
If you need to adjust your portfolio due to circumstances changing, then talk to us.
5. Don’t try and chase returns
Can you spot a pattern in the table below?
The grid shows the returns of individual asset classes each year since 2000 in EUR terms. As you can see (or not!), no one asset class outperformed every single year. Predicting the ‘right’ asset class is only possible with the benefit of perfect hindsight – so don’t try!
6. Turn off the news
No amount of flicking through social media, watching the news or tuning into the echo chamber of discussion forums will make your crystal ball any clearer, so give yourself a break. Turn off the radio, go for a walk and remind yourself about what is important in life. If you’ve got money invested in the stock market, there are many people in the world with bigger problems than you.
The media will constantly fuel our need to seek out information that may represent a threat to us, yet the press hardly ever reports stories of gradual and solid growth, because its normal and boring, and doesn’t sell papers.
Look beyond the recent headlines and focus on what you can control – your risk level vs. your need and willingness to take risk, diversification, controlling costs, managing taxes, rebalancing appropriately, and keeping a long-term perspective.
7. Talk to us
The current situation is unusual, we agree, but we have seen it’s like before and we won’t panic. We can help you keep calm and stay focused on what matters most – your long-term goals and your financial plan.
In reality, the biggest threat and risk to your long-term investment portfolio is your emotion – fear or greed. We see our job as taking the emotion away and acting like a circuit breaker between you and your portfolio. If you are still concerned and wish to discuss your financial plan, contact us to arrange a call.
Stay strong, try and ignore the volatility, and look at the bigger picture. Keep these key points in mind and you should be fine.
- Risk is essential to generating long-term positive expected returns
- Understand that negative returns over some time periods are a normal and necessary part of investing
- Not generating sufficient return in the long-term is a much bigger issue than short-term volatility
- Know that you only have to make one bad market-timing decision to wreck the most carefully formulated projections
- Know that second guessing the market is not a winning strategy
- Tune out the media noise
- Talk to your adviser and refer back to your long-term financial plan
“If you fight angry, you make a lot of mistakes” – Floyd Mayweather
Further information can be found in Our Guide to Investing in Ireland Download Guide