It’s been a strange few years for investors. The last 3 years has been challenging to say the least. The US has now entered a bear market. The ASX has fared better and is not there yet. Investment markets are subject to many factors including interest rates, inflation, future expectations and herd behaviour. Investors can be fickle and can overreact, very often acting after the fact and missing the mark.
There is no doubt there are many headwinds pushing markets at the moment and these things are all interrelated. High inflation, rising interest rates, supply chain blockages, the war in Ukraine, China’s continued zero COVID policy and lockdowns, high oil prices and gas supply issues, skills shortages. This is counterbalanced by the world coming out of the COVID freeze, large pools of household savings, tourists on the move again. Central banks around the world are moving to rein in inflation and recent comments from central bank leaders have been encouraging on this front.
Investment markets go through cycles and will always rise and fall. It is nearly impossible to predict when a correction is going to happen, how long it will last for, how deep it will be and how quickly it will rebound. Instead of trying to pick when a market will go up or down, it’s important to make sure you manage your risk and maintain a well-diversified portfolio of quality investments. Investments that will revert to fair value after the turbulence, the swings and roundabouts. The best work is done before the correction comes.
It is important to realise that investments are considerably cheaper than they were 6 months ago. This is a time to remember the famous Warren Buffett quote—’be fearful when others are greedy and greedy when others are fearful’. I’m not sure being greedy at any time is a good idea but the message is clear. Jumping out during a correction is a good way to crystalise losses and lose money.
Our tips for times like this:
1. Check your investment goals
What’s important now? Have things changed since your portfolio was established?
Has your risk tolerance changed? Is this an appropriate time to be making changes?
2. Reduce Drawdowns
You should consider if you can temporarily reduce or stop any regular drawdowns on your portfolio. This can reduce the impact of the downturn on your long-term performance.
3. Check your portfolio
Regularly review and monitor your portfolio to ensure it remains invested in quality holdings and is properly diversified in accordance with your tolerance for risk. This is something your adviser will do with you on an ongoing basis.
4. Stay Calm and hold the line
Markets are cyclical and will have ups and downs. Jumping out of markets during a downturn crystalises losses. Going to cash when sentiment is depressed is likely to drag on longer-term returns.
5. Think Countercyclically
Buy in Doom and sell in Boom! Going against the herd can often pay off. No-one rings a bell to tell you when the correction is finished or when it is about to start. You can only look at the relative value and prices and remember there are always swings and ultimately good quality investments come back to their fair value.
If you are concerned about your portfolio or have any questions, please give us a call on 9011 7889.