Whether you’re a seasoned professional investor or someone who just has a few investments in the stock market, drastic and highly volatile movements in share prices over recent weeks have probably made you increasingly concerned.
It doesn’t matter how much experience you may have, volatile stock markets can cause people to panic and make poor or irrational decisions.
Having been working in financial markets for over 20 years, I’ve witnessed and worked through significant stock market adjustments (tech boom and bust 1999 - 2001, economic effects post September 11 attacks, financial crisis 2008, European sovereign debt crisis 2010, Covid-19 2020).
But this doesn’t mean that thought processes change from one event to the next.
Emotions can often take over and decision making is put to the test.
So, here are five important factors that anyone should remind themselves of before starting to make decisions about your investment portfolios.
When you witness share prices tumbling by +10% on a daily basis, the urge to panic and sell everything takes over.
But Rule #1 is: Don’t panic.
You knew that, right? But you still do it. Emotions take over and you can’t help it.
Resist the urge to speculate, be fearful and take irrational decisions.
Yes, it is tough when it’s virtually impossible to forecast the ultimate implications of recent events and how it will play out over the medium term. But this alone doesn’t necessarily mean you should exit the stock market.
Significant falls can often be followed by large rises, so selling out of fear can result in losing out at both ends – selling when prices are down and not buying until it is too late.
Catching up is hard to do, especially when generating additional excessive tax and transaction costs in the meantime.
Use this time to evaluate the stocks in your portfolio. Why did you invest in these stocks in the first place? Are the fundamentals still valid? Would the impact be a short-term blip or a long-term problem?
Once you have assessed your position, then you can speak with your financial adviser and take the necessary action if required.
You should already have a financial plan for your investments, so if you don’t have one then develop one!
Having a plan is key to meeting your long-term goals and this should also include what you should do when volatile markets materialise. It will also help you to stay focused without being distracted by short-term movements in financial markets.
Such a strategy will aid you in setting realistic objectives and enable you to more effectively manage your return expectations.
Stock markets always have ups and downs, with some movements greater than others. It is unavoidable and you need to be prepared for this.
Attempting to time the market is difficult at the best of times, so you’re likely to become unstuck when trying to do it when markets are highly volatile.
Taking the long-term view is always beneficial when making investments. Thinking too much about short term movements in volatile markets will likely give you sleepless nights but if you consider that downturns are actually quite normal and often relatively short, you may sleep somewhat easier.
Over the past 30 years, the stock market has fallen c.15% on average from high to low each year but has still managed to achieve gains in 80% of all calendar years.
If you’re unsure of what to do, then keeping invested is often the best course of action, however uncomfortable this may seem at the time.
And checking your investments 20 times a day is not going to help. The more you focus on hourly or even daily movements, the more likely panic will once again set in and you will sell at the wrong time.
Don’t forget, the investment mix that you had originally planned, which may have included a mix of stocks, bonds and short-term investments, should have been one that you can live with, despite short term market movements. Try to remember this in times of high volatility.
Any financial adviser will tell you that diversification is important for a balanced portfolio. This is because being able to construct a portfolio of investments that don’t all behave in the same way can protect your funds in difficult times.
Indeed, when markets are volatile you may wish to consider enhancing your level of diversification, for instance across shares, bonds, cash or commodities, in order to have a smoother returns profile.
Of course, this may have a diluting effect on the risk profile of your portfolio, so bear this in mind when thinking about your long-term goals and return expectations.
Cash can often be the safest place to hold your funds during periods of high uncertainty, but this also means you’re likely to miss out on opportunities when the market recovers.
And with inflation being higher than interest rates over recent years, the purchasing power of cash has been falling.
If you have a percentage of your portfolio in cash that is larger than you would normally hold, perhaps this would be a good time to consider investing in certain assets that you previously thought were too expensive.
It all depends on how you wish to diversify; whether that be in terms of asset class, sector, geography or investment style and this is something you would need to consider within your long-term plan.
Obtaining financial advice is always advisable, both in calm or volatile markets. The adviser will be able to define your goals and risk requirements, then be able to identify investments that adhere to your specific financial objectives.
S/he will be able to guide you through the best course of action in good times and bad and especially in difficult markets, help you stay focused and ensure that you remain on track to meet your goals within your specified time horizon.
So before you let panic set in, sell all your investments and start stuffing your funds under the mattress, take a step back, breathe and get some financial advice before potentially making investment mistakes you may soon regret.
Sharp Insights is a business, markets and wealth blog. It is dedicated to bringing you insightful and knowledgeable information so that you can make better decisions about your financial well-being and maximise the potential in your personal and business life.