Investors around the world have realised that fighting inflation is going to be painful — which in turn has caused turmoil in the markets. Since the start of the year the Australian market is down 12% – but that’s good relative to other markets.
In the US the S&P 500 has fallen more than 20% since January, making it now officially a bear market. And the Nasdaq, where the big tech stocks trade, is down more than 30%.
We haven’t seen this sort of volatility in markets since March 2020 when the pandemic caused markets to fall by more than 30%. However, Government stimulus packages meant that the bear market was the shortest on record – markets had pretty much recovered over the next month, and by the end of the year all the major markets were showing positive returns. But now central banks are raising interest rates instead of cutting them. Many economists are saying that we are heading towards recession…
When markets are volatile it is very un-nerving for an investor, and more so if you are in retirement or are approaching retirement. You can either do something – anything – or you can do nothing. In volatile times its always best to do nothing – so lets look at some strategies to help get you through this period.
1. Tune out the noise from the financial media
The financial media is full of fact and fiction. The facts are straight reporting on what happened in the market yesterday, company earnings, acquisitions and mergers, policy announcements, etc. Fiction is everything else – the views of economists and fund managers on what will happen tomorrow. That’s just noise and designed to scare and confuse investors. Remember that markets are unpredictable and rarely do what the experts predict they will.
2. Trying to time the market is hazardous to investment success
Recoveries can come just as quickly and just as violently as the prior correction. In 2008, the Australian share market fell by nearly 40%. Some investors capitulated, only to see the market bounce by more than 37% in 2009 then continue to rise over subsequent years, resulting in one of the longest bull markets the world has seen. The lesson is that attempts at market timing risk turning paper losses into real ones and paying for the risk without waiting around for the recovery. Warren Buffett believes trying to time the market is a waste of time and hazardous to investment success.
3. For every seller of a stock, there is a buyer
The media headlines proclaim that “investors are dumping stocks” but remember someone is buying them. For every investor who sells a stock because they believe that it will go down in price there is another investor who believes that stock is now trading at a fair price and that it is a good time to buy. Those people are often the long-term investors.
4. Diversification is crucial
Often in falling markets you hear that “Diversification is dead” as everything is going down. But for a long-term investor the benefits of diversification across stocks and across markets is obvious. In the current period bonds were first to be sold off while stocks held fast. But now stocks are falling while bonds have not changed that much and have a higher yield than last year. So diversification spreads risk and can moderate the volatility in a portfolio.
5. Discipline is rewarded
Market volatility can be worrisome, no doubt. The feelings generated are completely understandable. But through discipline, diversification, keeping focused on progress to your goals and accepting how markets work, the ride can be more bearable.
Sometimes doing nothing is the right thing to do
Sometimes in life it is good to make changes that helps you reach your goals. For example, if your goal is to lose weight and get fit, then you can change your diet and join a gym. If you want to be a rock star, go take some lessons and put in hours and hours of practice. If you want a good investment experience, then see your financial advisor and let them put you in a diversified portfolio designed to meet your goals.
When markets are volatile it can be very distressing. You can do one of three things:
- You can sit around and feel depressed and ask around for “What should I do?” and “what will happen?”
- You can do something to your portfolio – anything! But reacting impulsively to daily market movements however this is almost always counterproductive.
- Or you can accept that volatility is a normal part of investing, and bear markets don’t tend to last very long. By being in a well-diversified portfolio and staying disciplined you can relax knowing that you are set to enjoy the returns when the market bounces back.
Increasing market volatility is essentially an expression of uncertainty. Markets move on new information which is incorporated into prices immediately. Those prices reflect the aggregate views of millions of participants, so unless you have information that no-one else is privy to, you are unlikely to get an edge by trying to time your entry and exit points.
What matters for individual investors is whether they are on track to meet their own long-term goals detailed in the plan designed for them. Unless you need the money next week, what happens on any particular day is neither here nor there. It is the long-term returns that count.
Remember, volatility is not necessarily a risk. As always, a financial advisor can help put you in a portfolio that will achieve your long-term goals and help keep you disciplined when markets go through their ups and downs.