For some investors, the market volatility we are seeing this week has resulted in anxiety and concern. I have been reviewing various market updates, and taking note of commentary regarding the current events, and thought it would be timely to summarise a few points to help put current events into perspective.
I have noted below four simple investment rules to keep in mind for times like this – when there is a need for a steady, measured approach – and have finished this update with a brief summary of the three significant factors that are currently impacting markets.
A Guide to Investing in Volatile Times
Think long term when investing in growth assets. As is always the case, investing is a long term process, and over time markets tend to recover from events that may seem overwhelming in the near term.
Diversification helps minimise losses and protect a portfolio’s value. The very point of diversification is to limit downside losses in difficult markets. If a market correction happens (such as what we’ve seen recently) and you’re properly diversified, you’ll be less likely to lose a substantial amount. Remember – its important to not have all your eggs in one basket.
With bumpy markets, fear is a natural reaction. One of the best ways to deal with it is to seek advice from a specialist. Having a plan in place means you’ll be less likely to deviate from it – even when markets test our emotions with wild swings. Remember – if you are worried, call your adviser.
Don’t try to time markets. Unless you absolutely have to, the rule of thumb is that you never want to sell in a down market and turn a paper loss into an actual loss. Remember markets ultimately bounce back from bouts of turmoil – you don’t want to miss that bounce when it eventually happens.
Given various commentators are comparing current events to the Global Financial Crisis (GFC), I felt the following points made in todays Financial Times, by Mohmed El-Erian – Chief economic adviser for Allianz are of interest.
“Unlike the global financial crisis, this is not a crippling crunch in the banking or payments and settlements systems. Instead, the world economy and markets are going through a rough patch that has been years in the making. The immediate cause of the turbulence is the erosion of three anchors that had kept markets steady, or even rising, despite deteriorating fundamentals.
- First, the actual and feared impact of the coronavirus is destroying supply and demand simultaneously. This has undermined the momentum of global economic growth.
- Second, central banks are no longer seen as able to repress financial volatility through injections of liquidity and ever-lower interest rates. Policy interest rates are already negative in Europe.
- Third, Saudi Arabia’s decision to launch an oil price war, which has sent the price of crude down more than 20 per cent, has imperilled the viability of small oil companies and undermined parts of the corporate bond market. As a result, elevated asset prices have begun to fall back to where fundamentals suggest they should trade”
As you can see, there are some issues that will need to play out over the coming weeks and months. While no-one can predict how long this situation will last, it’s good to remember that markets will always change and to realise that in the history of share markets, very few individual events have had a meaningful impact on long-term returns.
Please note that the content of this communication should be treated as general advice given it does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.