Staying calm in volatile times
Turbulence in financial markets can be alarming for investors, but kneejerk responses and selling off assets without considering all the implications may end up being very costly.
Financial decisions that are made in a panic rarely end well for investors.
This reality is worth remembering as financial markets experience volatility in the wake of the COVID-19 pandemic and other economic headwinds. Sensational headlines about share-market plunges and falling house prices may give some people the jitters and prompt them to sell off assets.
The risk is that you can wind up making things worse by offloading assets at a fire-sale price while missing out on future gains. Consider the example of the global financial crisis and Commonwealth Bank shares. In late 2007, CBA stocks were trading at just over $60; they fell to just under $27 in early 2009 as the GFC took hold; and in 2022 they have been trading at or about $100 a share.
So, an investor who had 10,000 CBA shares just before the GFC (worth about $600,000 at the time) and sold them in a panic (for about $260,000) because of the crisis would now be lamenting that their CBA shares would be worth about $1 million today if they had held on to them. This simplified example proves the point that time in the market is better than trying to time the market.
While blaring media reports about potential financial losses in a falling market can seem like the end of the world, it is important to turn off the noise, seek advice from your financial adviser and invest for the long term. Over time, most assets can and do recover.
Crash and burn
The temptation to sell off intangible assets such as shares in volatile times makes little sense.
For context, think about what you would do if, during a housing market crash, the value of your property suddenly dropped significantly. If someone then knocked on your door and offered a low-ball price, would you sell? Almost certainly not.
Yet it is not uncommon for poorly informed investors to sell such share assets when the market slides, thereby crystallising their losses. Rather than reacting irrationally, here are some actions you should consider taking when markets are dropping.
- Educate yourself – seek help from a financial adviser, who can explain typical market cycles and point to graph timelines that demonstrate how markets can fall and rebound. Armed with knowledge, investors can think clearly and plan for volatility.
- Keep focused on your goals – you should establish long-term financial goals for your individual, family and retirement purposes. When markets turn, it is important not to lose sight of these plans. Remember, too, that investment goals should be aligned with the investments you are making; for example, if you are going on a holiday in 12 months you cannot expect a quick investment in shares to pay for that break, but those stocks could be crucial to funding your retirement in the years to follow.
- Learn from history – from wars to financial crises and pandemics, global markets have always at some point experienced significant financial shocks. However, markets typically recover from downturns and go on to deliver impressive returns over the long-term.
- Trust in diversification – having a mix of shares, bonds, property and cash, for instance, can help you limit any portfolio losses during a market fall. As one market drops, another one can often provide a counter-balance.
- Avoid checking your portfolio every day – whether it is a share portfolio or your superannuation fund, watching your balance every day is pointless – and potentially stressful. There is a temptation to sell assets if there is even a temporary downturn, whereas doing nothing may be a better strategy. You are investing for the long term, not tomorrow.
Sound advice pays off
In tandem with an experienced financial adviser, investors can plan and grow a resilient portfolio of assets that stands the test of time. A combination of quality assets that are invested over a significant period is a proven strategy that has worked for many people through the ages.
If you are worried about volatile markets, discuss those concerns with your adviser and, together, you can determine whether any changes are necessary.
While it is often hard to ignore around-the-clock market news, the key is to draw breath, contact your adviser and avoid any emotional decisions that could see you stray from your financial plan.
Panicked financial decisions can destroy family finances and ruin retirement dreams. So, click here to connect with a leading accounting and wealth management firm that can help you chart a course through volatile markets.