Aug 26, 2015
It’s one of those rare times when financial news moves from the business pages, onto the front page. “Market meltdown” makes for a great headline however for individual long-term investors the biggest danger is an emotional meltdown.
To assist you in making sense of the extreme volatility within investment markets, we thought it timely to raise a number of points; all of which we have discussed with you previously.
Please see the article titled “The Patience Principle” written by Jim Parker from Dimensional for you which helps put long-term investment in perspective and is a quick logical read.
- Don’t make presumptions
Remember that markets are unpredictable and do not always react the way the experts predict they will. When central banks relaxed monetary policy during the crisis of 2008-09, many analysts warned of an inflation breakout. If anything, the reverse has been the case with central banks fretting about deflation.
- Someone is buying
Quitting the equity market when prices are falling is like running away from a sale. While prices have been discounted to reflect higher risk, that’s another way of saying expected returns are higher. And while the media headlines proclaim that “investors are dumping stocks”, remember someone is buying them. Those people are often the long-term investors.
- Market timing is hard
Recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was at its worst—the US S&P 500 turned and put in seven consecutive months of gains totalling almost 80 per cent. This is not to predict that a similarly vertically shaped recovery is on the cards every time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.
- Never forget the power of diversification
While equity markets have turned rocky again, highly-rated government bonds have flourished. This limits the damage to balanced fund investors. So diversification spreads risk and can lessen the bumps in the road.
- Markets and economies are different things
The world economy is forever changing and new forces are replacing old ones. This applies both between and within economies. For instance, falling oil prices can be bad for the energy sector, but good for consumers. New economic forces are emerging as global measures of poverty, education and health improve.
- Nothing lasts forever
Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.
- Discipline is rewarded
The market volatility is worrisome, no doubt. The feelings being generated are completely understandable and familiar to those who have seen this before. But through discipline, diversification and understanding how markets work, the ride can be made bearable. At some point, value re-emerges, risk appetites re-awaken and for those who acknowledged their emotions without acting.
Remember we are here to make sure you and your family get the outcomes you require including making the right decisions, if you have any queries, please call me and we would be happy to discuss further.
Also, try not to let the media educate you on what is happening in markets. Sensationalising helps them sell papers.
As always if you have any questions, do not hesitate to contact us.
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