Citywide Financial Partners on avoiding stock market stress, understanding market fluctuations and making effective investment decisions during periods of market volatility.
The last month hasn’t been kind to investors. After a year of slowing growth and swirling Brexit uncertainty, the stock market’s latest dip will prompt many shareholders to ask: should I panic yet?
Our answer is simple and always the same: no.
Market corrections like we’re seeing across the globe are an integral part of the investment cycle. If they weren’t, it wouldn’t be a cycle. Fear-driven decisions to sell one’s investments during periods of market turbulence are among the worst for long-term investment success.
It helps, therefore, to have a few techniques for coping with investment panic caused by market tremors. Here are five to try next time the headlines have you reaching for your financial planners’ phone number.
1. Don’t panic
Emotional decision-making is the enemy of financial success. Haste is the other.
Effective investment strategies built by qualified financial planners are designed to succeed over the long-term and withstand market shocks. Instructing your planner to sell when panic hits is not a route to sustainable performance and could quickly undo your previous investment gains.
Yet research shows many investors choose to dip their toes in the market at precisely the worst time: after making considerable losses or gains when the market is at its highest or lowest.
When you feel the urge to sell your investments quickly, for fear of losing greater sums, ask yourself: am I thinking rationally or reacting to my own sense of panic? Would a decision to sell now conform to the investment strategy planned between me and my financial planner?
2. Turn off the news
Panic-driven investment (or divestment) decisions typically fail because they’re based on limited or impartial information.
The best supplier of misleading information is the news media. Panic sells papers – but that doesn’t mean you should believe everything you read or react to every worrying financial news story.
“What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact,” says Warren Buffett. Reading more news will not make you feel better about your investment situation, but worse.
The three headlines at the top of this article come from a single newspaper over a period of three weeks, and are only a limited selection of the doom-mongering lines we could’ve chosen from the same publication and period. When panic hits, avoid the papers.
3. Consider the bigger picture
Market corrections – where an index loses 10% or more of its value – are a normal and expected part of the investment cycle.
Their occurrence does not mean that a market is going into terminal decline. In fact, the general trend for long-term market performance is upwards – which is why many investors (including Warren Buffett) choose to invest in passive portfolios. In this way, they trust the rising tide of the stock market to out perform actively-managed funds, often with success.
An analysis of the US stock market between 1979 and 2017 shows that in half of the years, the market lost more than 10% of its intra-year value, and in a third of years, over 15% of its intra-year value. In spite of this, market returns were positive for investors in 32 of the 37 years.
As an investor, it therefore pays to consider market shocks in their wider context.
4. Count the cost
In the moment, investors cannot know whether selling their investment during a period of market volatility is effective. That’s because it’s impossible to gauge whether volatility indicates a longer-term downward trend.
Moreover, it’s impossible to tell whether the moment at which you sell is at the top or bottom of the movement of the market. Sell at the right time, and you could protect your investment from further losses. Sell at the wrong time, and you might have to buy back into the market at a higher price.
Gaming stocks in this way also damages investors’ chances of making the best possible gains. That’s because stocks make their largest gains in the smallest number of days.
Investor A invested in $1,000 in the S&P 500 in 1999 and left their investment intact until 2017, realising a 9.81% annualised compound return. Investor B invested the same amount but sold their investment and missed the single best-performing day in that period, earning a 9.38% return. Investor C did worse still, investing $1,000 but missing the five best-performing days, cutting their return to 8.21%.
The difference in their portfolio value in 2017? Investor A is worth $13,379 and Investor B, $12,313.
Investor C? Just $9,114.
Think twice before selling your investment. It could cost more than you think.
5. Embrace introspection
As Ray Dalio is apt to say, pain is instructive.
If market volatility has left you panicked, it’s worth asking yourself whether you feel over-exposed. If so, your investments are liable to cause you more stress in the future.
Before building your investment plan, your financial planner should have spent time working to understand your long-term financial goals and personality. Crucially, this should include your appetite for investment risk.
If the points above and your financial planners’ assurances have not helped ease your concerns about your investments, it may be time to shift your investment strategy to something more risk-averse. Contact your financial planner to get the ball rolling.
In an investment career spanning five decades, Bogle amassed a personal fortune of $80 million by advocating an investment philosophy that was almost totally passive. For Bogle, no amount of volatility could persuade a wise investor to panic and relinquish their time-earned gains.
So whilst you stand firm like Bogle you can view the madding crowds sell, sell, sell, with a quiet calm, knowing that this is the way to make real money.