talking points
Never Panic…Focus On Your Goals
Volatility is normal
Financial markets have experienced extreme market volatility in 2022. Volatile markets are usually characterised by wide price fluctuations and heavy trading – much like the ocean’s waves. Like the open ocean, the market is constantly churning and the degree of market volatility varies from small ripples to rolling waves.
Despite the negative connotations, volatility is normal and happens over time. It is not necessarily a cause for panic and is something that needs to be considered when investing with specific goal(s) in mind.
Do not panic.
It might sound counterintuitive but during periods of market volatility, the correct course of action might be to take no action. Yes, that is correct – do not look at your investment statement. On the whole, this is difficult to do because volatility can leave investors feeling vulnerable and concerned that they have to react. It means that investors who jump ship after a ‘big wave’ may break the cardinal rule of investing by ‘selling low.’
This relates to an old Wall Street saying that financial markets are driven by two powerful emotions – greed and fear. Succumbing to these emotions can have a profound and detrimental effect on investment outcomes, as too often investors enter (on greed) or exit (on fear) the market at precisely the wrong time.
Consider this – if you own a home and its value went down this year, would you panic and sell? Most likely, you would not. You bought your house knowing that you would live there for a while and thus, its day-to-day price movement is not that important. The chances are that the value of your home will rise over time and that is what you should focus on.
Be disciplined and stay invested
There might be many investors who have made money by seemingly timing the market correctly – in other words, predicting market movements and selling or buying shares accordingly – but it is likely that this was due more to luck than skill. For the average investor it is not only difficult to foresee market upswings and downswings, but also challenging to make decisions that are not marked by emotion.
We know that markets do not move up in a straight line and that volatility is inherent in equities as an asset class. Checking a portfolio too frequently can make investors more susceptible to loss aversion, since the probability of seeing a loss in a short time period is much greater than over longer time periods. As a result, investors that frequently check their portfolios tend to take a less than optimal amount of risk. True long-term investors are more willing to allocate towards risky assets because they do not care about the short-term ups and downs.
Your time horizon – ‘what it says on the tin’
The period over which you need to invest in order to meet your investment goals should influence your willingness to take on more or less risk. It is a component that can help to align investment goals with risk tolerance and ultimately, the portfolio you consider investing in. You therefore need to ensure that your money is invested in line with your investment goal(s) and not necessarily in the best performing asset class over the recent past.
Conclusion
We all know that acting on emotion can lead to irrational decisions – and difficult lessons. However, if you develop a sound investment game plan and stick to it, you are more likely be in a better position to pursue financial goals. A game plan can help remove emotion from the equation, enable investors to make the most of potential market opportunities; and help preserve assets during periods of volatility.
Investors who are not saving for a goal and/or do not have the discipline to remain invested during the time spent saving for a goal, are more likely to realise the waves of volatility that occur in their period of investing. In contrast, investors with clearly defined goals, that are able to shift their focus on the potential of meeting their needs and requirements, have the luxury of realising infrequent negative market returns. There is unfortunately no assurance that an investment strategy will be successful but investing with a clear plan provides a higher probability of meeting your goals/needs.
Key points in this article:
Market volatility is inevitable. It is the nature of the markets to move up and down over the short term
One way to deal with volatility is to avoid it altogether. This means staying invested and not paying attention to short-term fluctuations
Be focused and always revert to your game plan – the time horizon(s) you have put into practice to meet your goals