6 Reasons to keep a Cool Head in a Market Downturn
- 1. Selling down your portfolio in a market downturn will just crystallise a loss. When markets are volatile, it’s easy to feel tempted to sell, but this just turns a paper loss into a real loss. The best way to avoid making emotional investment decisions is to have in place a well thought out, long-term investment strategy and stick to it, even during inevitable downturns.
- 2. Shares tend to be impacted by short-term volatility from both macroeconomic factors or market sentiment. However, the long-term trend of the major share markets is one of positive growth over time. Bear in mind, bouts of volatility are the price we pay for the typically higher long-term returns we get from shares.
- 3. When shares and growth assets fall in value, they are cheaper. This can potentially offer investment opportunities.
- 4. While shares may have fallen in capital value, it is important to keep in mind the dividends. The income that you receive from a well-diversified portfolio of shares can remain attractive, despite falls in market value.
- 5. The economic environment globally and in Australia is still quite stimulatory, meaning interest rates remain at fairly low levels. This makes debt relatively cheap, which in turn encourages investment.
- 6. A properly diversified portfolio of investments may give you exposure to shorting and hedging strategies which can allow you to benefit from market downturns. Furthermore, investing in international assets provides greater diversity which can provide a counterbalance when domestic holdings are underperforming. It does expose you to currency risk but this has been a significant benefit as the Australian dollar has fallen. Using these strategies in a diversified portfolio of investments can help to minimise the total losses that are experienced during a share market downturn.
The growth in the share markets over the past 10 years has benefited most investors, but now is a time when stock selection and active portfolio management become even more important. It could be a bumpy ride in the year ahead. Timing in and out of these movements is nearly impossible. A considered, disciplined approach is the best defence. Panic selling or following the herd can lead to significant long-term losses and erosion of wealth.
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