Stay calm and remain focused

10 April 2020

4 minute read

With little sign of the coronavirus pandemic easing soon and calm returning to financial markets, what can investors do to meet their long-term investment objectives?

Key points:

  • The coronavirus pandemic is likely to keep financial markets extremely volatile for many weeks
  • Staying invested and avoiding the urge to sell assets in market sell-offs usually makes sense
  • Many of the sharpest falls in equity prices have soon been followed by the best rises
  • Focusing on your long-term investment objectives is key.

As financial markets sold-off and the coronavirus pandemic spread, some of the largest intraday swings in equity prices were seen in March. The month when the longest bull market on record abruptly ended. These are unsettling times.

Investors can sometimes be their own worst enemy, especially when the future looks particularly uncertain. We examine some behavioural issues to consider during both the present – and future – upheaval in markets. While the pandemic will eventually pass, it will not be the last event to scare investors.

When portfolio valuations swing wildly and there is little sign of when markets will start to recover, it can take an emotional toll on investors. Staying invested, or even making new investments, as others sell equities and bonds to hold more in cash, requires considerable composure and discipline. It is when markets look most precarious that our actions can lead us astray.

While selling investments may help investors sleep better at night, doing so turns paper losses into actual losses. As such, initial emotional comfort may make it more difficult to meet the ultimate investment objectives. For instance, many of the “best” performing days in equity markets have followed the worst; and missing just a few of these days is likely to hurt long-term performance.

Time in the market or timing the market?

History shows us that “time in the market” is more important than “timing the market”. Once out, it can become more difficult to get back in. Emotionally-driven investors tend to wait until markets rise enough to feel “safe”, risking missing out on much of the recovery. This is the opposite of the maxim to “buy low, sell high”.

In troubled market conditions, one answer may be to look longer term. This can include checking that your portfolio is well positioned to provide the investment returns needed and assessing whether new market opportunities are available to help achieve them. Averaging in fresh asset purchases over a long period of time, rather than investing the capital at the same time, is often the most appropriate strategy when volatility is particularly high.

The present downturn has been caused by the uncertainty of the impact of a global health crisis, not by imbalances in the financial system as was seen in the financial crisis of 2008. While the pandemic’s effects continue to change, this is primarily an external shock to the global economy that is transitory in nature.

The extreme market turbulence seen since February highlights the importance of a strong investment process and a considered approach to assessing risks and opportunities. The best way to avoid impulsive urges, that could be costly, at times like these may be to keep your head and maintain a sense of perspective.

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Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

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