Surviving market turmoil
The ongoing Trump trade war saga is keeping everyone on their toes, as each time a tweet flies markets and currencies react. Globally, volatility is on the rise, and the JSE – already under pressure from anaemic economic growth and a number of corporate scandals – does not go unscathed when world markets turn lower.
Source: Cannon Asset Managers (2019)
While it is tempting to react to such news, as an investor, successfully navigating your way through market volatility means resisting the urge to panic.
If anything, panicked selling tends to lock in losses rather than protect capital. In addition, it also removes the prospect of participating in a market recovery when it happens.
When the global financial crisis first struck, world stock markets shed almost half their value in a matter of months. However, any investor who disinvested then would have lost a great deal of wealth considering that 18 months later the world equity market had recaptured most of its lost value. Further, within ten years, global indices were up around 200% from recession lows.
However, in a day and age when it is as easy to pick up your smartphone and see a play-by-play of how your portfolio is performing as it is to check the weather, sitting on your hands has become more difficult than ever.
There are three key principles for investors to bear in mind before making any knee-jerk investment decisions.
1. Markets ebb and flow
Market declines are routine in the investment world. Understanding that stock markets ebb as well as flow is an essential step in creating healthy financial habits.
Unfortunately, our desire for instant gratification often presses us to not only invest our money in the latest hot stock, but also to liquidate our holdings when interest in that particular investment cools.
Investors must first understand that day-to-day fluctuations can be caused by many factors. Typically, none of these have a meaningful impact on the selection of asset classes within portfolios, or the investment case for the underlying assets themselves.
The best way to fight your basic instincts is to have a long-term investment strategy, complete with detailed investment goals and a clear time horizon which will inform the choice of asset classes within your portfolio.
2. Re-adjustments come at a cost
Behavioural finance teaches us that we are hardwired to want to fix things that we think are broken. However, what few investors realise is that a portfolio that is not presently delivering the desired short-term returns does not necessarily need to be fixed.
Portfolio adjustments made in response to volatile market conditions can have far-reaching consequences on investment performance. And an investment strategy that sees you locking in losses and picking new investments based on recent market movements is no strategy at all.
Many factors need to be considered before re-adjusting your portfolio. Further, it is important to remember that all re-adjustments come at a cost, which may include trading costs, penalty fees and tax implications.
These costs then need to be carefully weighed against forecasted returns before taking any decisions.
3. Research is key
The world of investing can seem daunting or dreary. This means that many people will spend more time window-shopping online than they will spend conducting investment research. However, the more knowledgeable you are, the more successfully you will be able to navigate your investment journey.
This said, navigating your emotions is often the most difficult part of investing.
If you are prone to making rash decisions during market downturns, your portfolio might need to be more conservative than your investment horizon would otherwise indicate. The benefit of being slightly more conservative and holding onto investments far outweighs the potential for greater returns if it means that you may risk selling out of your portfolio during a crisis.
To this end, consider seeking expert advice or assistance, particularly if you are concerned about the impact of financial market movements on your investments.