I wrote a post at the end of 2019, while we were in the midst of a sustained bull market, wondering when it might turn to a bear. It turns out that we didn’t have to wait long!
Of course, every decade has witnessed periods of volatility. In the 1980s there was the Black Monday crash, then came the dot.com bubble, which burst in the early 2000s, the financial crisis (2008), Brexit (2016) and the trade war between China and the US, which began in 2018. All of these events triggered investor panic to a greater or lesser degree sending markets into freefall. Now we are kicking off the 2020s with a pandemic which has had the same effect!
But don’t forget that bulls follow bears and peaks follow troughs. Although this is a proven cycle, which should reassure investors, volatility can often trigger dramatic emotional swings from euphoria to despondency as the value of stocks go up and down. This emotional response is incredibly stressful but it doesn’t have to be like that.
A bear market occurs when share prices fall more than 20% from recent highs. This tends to trigger negative investor sentiment which is accompanied by widespread pessimism and declining economic prospects. This challenging trio can be scary for investors but if you follow some sound investment principles, there is no need to get anxious, panicked or depressed when the market hits the skids.
Here are some dos and don’ts on coping with market volatility.
- Don’t listen to the media
The media focus on the market peaks and troughs, especially the troughs. ‘Plummeting share prices’ is a far more attention-grabbing headline than ‘share prices have been slowly rising over the last few decades’ so that’s what the media will tell you. If you have a long term financial plan, don’t even bother looking at the anxiety-inducing headlines.
- Do have a financial plan
That said, you absolutely need a long term financial plan in place which clearly sets out your financial goals in the short, mid and long term, and an investment strategy that will enable you to achieve them. If you have a sound financial plan, you can sit back and trust the process. If you don’t now is the time to rectify that.
- Don’t go it alone
Some people manage their own financial planning and it’s perfectly possible to do so but if you’re the kind of person whose emotions zigzag with share prices it can be comforting to have a professional by your side. They can offer a more objective viewpoint through volatile periods and reassure you that your investments are on track even if your portfolio takes a hit. For me, a financial wingman is a must whatever the markets are doing and indeed, a global survey carried out in 2018 concluded that ‘Investors who had an adviser were more confident, had greater knowledge and a more balanced portfolio.’ Which brings us to point 4…
- Do make sure your portfolio is balanced
A balanced portfolio is achieved through diversification. Interestingly, the Global Investment Survey mentioned above found that ‘Investors using a financial advisor are more diversified compared to Do-It-Yourself investors.’Diversification simply means having a good mix of different assets – equities, bonds, cash, property and commodities. A portfolio with good asset allocation will balance out your losses and gains because different asset classes react differently to prevailing market conditions. So, for example, when stock prices are shaky, often commodity prices tend to rise as investors look for a safer haven.
- Don’t panic sell
Human nature dictates that we have a strong tendency to follow the herd. That means that when we read in the news that everyone else is offloading stocks we tend to assume that it’s the right thing to do. It’s hard to believe that so many people could be getting it wrong so we abandon rationality and logic and blindly follow them. While this may be understandable, savvy it is not. Often the result of panic selling is that investors miss out on the rebound which occurs after stock prices fall.
- Do stick to a dollar cost averaging strategy
If you are in a position to buy stocks on a regular basis, do so, regardless of what prices are doing. Buying little and often is a good strategy to minimise the effect of short term fluctuations in the price of shares and the risk of mistiming the market. It also means that a market decline has a silver lining in that you’ll get more for your money when prices are low and reap the benefit when the upward turn kicks in.
Investment and risk do unfortunately go hand in hand but there are ways and means to minimise the risk. Follow the dos and don’ts above and you should be able to weather the investment storms that will inevitably occur if you’re investing over the long term.
If you’d like help with getting your financial planning in storm-proof shape, why not get in touch with me?