Investing smartly when nothing seems certain
Adapted from the article ‘Stay the course’ by Carl Roothman, Head of Retail at Sanlam Investments
How you respond to market volatility is vital to protecting your long-term savings
In recent times, volatility and uncertainty seem to have become the norm in both local and global markets. These unexpected market movements can be scary – after all, you are seeing how political and economic forces beyond your control are affecting your hard-earned savings. However, the important thing is how you respond to this volatility – do you act on your fear and make short-term changes to your portfolio to try to keep up with the markets, or do you stay focused on your long-term goals?
In this article, we share a few basic tips that will help you make good investment decisions irrespective of what’s going on in the markets.
1. Make sure your financial plan is up to date
A well-defined financial plan tailored to your goals and financial situation can help you be prepared for ups and downs in the market, and to take advantage of opportunities as they arise. Market volatility should be a reminder that you – with the help of your financial adviser – should review your investments regularly and ensure that your portfolio is sufficiently diversified to minimise your risk exposure.
2. Keep perspective – market downturns are usually short lived
If history is anything to go by, short-term volatility is perfectly normal in equity markets. Historically, stock markets have risen far more than they have fallen, and the long-term trend of the markets has been upward. In fact, over the past 35 years, the market experienced an average drop of 14% each year, yet it still delivered a positive annual return more than 80% of the time. If you invest regularly over months, years and decades, short-term downturns will not have a significant impact on your portfolio’s long-term performance.
3. Avoid making hasty decisions – rather stay invested
In times of market volatility, it can be tempting to try to predict when the market is going to move up or down, and switch investments based on these predictions. However, few investors can predict with any degree of certainty when, and by how much, the markets will rise and fall. Even the industry experts get it wrong, as proven by various statements made by these experts right before the 2008 financial crisis that the global economy is looking strong. As a result, research shows that making short-term changes to a portfolio leads to worse performance than if you would have simply remained invested in the same funds.
In an ideal world, it would have been great if we could avoid the bad days in the market and invest during the good ones. However, the problem is that it is impossible to consistently predict when those good and bad days will happen. And if you miss even a few of the best days, it can have a very negative impact on your investment returns.
In summary, it helps to remember that in the world of investing, ‘time is your friend; impulse is your enemy’ – in the words of well-known investor John Bogle.
Speak to your financial adviser if you have specific concerns about your current investments or questions about how the current market events may affect your financial plan.