A ‘Bear Market’ or stock market downturn is more common than you think, just some downturns are greater than others.
How long they last is one of the most difficult things to forecast. Fundamental analysis, Technical analysis, Macroeconomics, Investor sentiment all help in determining the duration of the downturn and the path it will likely take.
Even though everything points to a reversal and change of fortune maybe imminent, any type of event can affect market direction throwing all forecasting out the window, events such as geo-political or a natural disaster are just a few that could turn markets upside down.
An Investor’s reaction to market movements can affect their investment portfolios as much as market behaviour.
Here are five mistakes you can make as an investor in a difficult market.
Not speaking to your adviser, even if no changes are made to your portfolio, a good adviser will take the time to reassure you of what is happening in the markets and what is the best course of action, this could be reducing your attitude to risk depending on your circumstances, re-balancing your portfolio if volatility has increased or changing some or all your investments holdings to reflect market conditions. Above all be honest and tell them how you feel.
Letting emotions get in the way of your investment decisions
It is perfectly natural to feel a sense of panic, or sell and run for the hills, investments falling in value is never a pretty sight. The way most investors react with market cycles is why so many decide to invest when markets are performing well and to sell investments when markets are falling.
By understanding your emotions, it is best to manage them and trust in a diversified portfolio that can not only benefit from market opportunities if they are around but also help weather the storm. For long-term investors, panic should not be a part of the emotion roller-coaster. Remember a high-risk portfolio not only achieves high rewards in a rising market but also above average volatility, in a market downturn higher risk could influence your emotional state.
Change your long-term risk
Volatile markets might make you think it is time to review your attitude to risk and your investment exposure – and potentially lower your risk. The hardest decision for many investors will be acknowledging that riding out the market downturn could be the best way to protect their investments and reach their long-term goals.
Markets can go up as well as down or remain the same, your capital is at risk, is the normal risk warning, however if money is not needed soon then it is advisable to allow your original investment plan to play out.
Withdraw your money
At times of market corrections, selling your investments will mean transforming a paper loss into real losses – and you could miss out on a recovery, there are two side to every coin and something that needs to be considered depending on the circumstances, remember a market correction is different to a crash.
The longer you are invested the greater the chance your investments will yield positive returns. When in doubt zoom out, what we mean by this is if you look at a brief period of time you see one thing, if you look over a 5–10-year period you will see a completely different picture. That means holding your investments for at least five years, but preferably much longer, the outcome is what you see in the bigger picture. Whatever short-term downturns you might come across will be insignificant to the bigger picture, stay focused on the bigger picture and try not to be distracted by the ups and down of daily portfolio performance.
Forget about inflation
Although nobody wants inflation as what normally follows is rising interest rates and higher mortgages, it does appear from time to time, but historically inflation is not around long and likely to be under control in 9-18 months.
Over an inflation period, investors should stay invested and stay diversified meaning do not put all your eggs in one basket.
Diversification has always been the foundation of a long-term investment process, whether it is a fund-based approach or direct equities, you should never hold a few funds, and likewise a few individual shares. Minimal diversification would cause risk exposure to go off the scale.
There are investments to hedge against inflation, however in some market condition these investments do not quite work out, Gold, Commodities, Bonds, Property income.
If you are losing sleep, then it might be a suitable time to reflect on whether you are comfortable to remain invested at your existing risk level. This could be for many reasons, you may be approaching retirement or already in retirement, your personal situation may have changed such as your employment or health, speak to us today or seek independent investment advice.