- The last few weeks have presented investors
with incredibly uncertain market conditions.
U.S. inflation indicates
that prices are rising at 8.6% per annum,
which is faster than they have been in 40 years.
As a response,
the U.S. Fed raised interest rates by 0.75%
at their most recent meeting.
Markets expect rates to rise
to around 4% by 2023.
However, many economists believe
that the U.S. will be in recession before then.
Stocks are down.
Crypto is down.
Even bonds are down.
Panic might seem like a reasonable response.
Some first-time investors might be hit with the fact
that, to their surprise, markets don't always go up.
But it's important to review what we know
about market downturns and investor psychology
in order to understand the market volatility
we're seeing at the moment.
I'm reminded of the legendary investor, Peter Lynch,
who was the head portfolio manager
of Fidelity's Magellan Fund
between 1977 and 1990.
The fund provided a return of 29.2%
and outperformed the S&P 500
in all but two of those 13 years.
However, investors in the fund
actually lost money over this time period.
This seems counterintuitive,
but by attempting to time the market,
buying into and selling out of the fund,
investors actually missed out on the returns.
The essence of this parable
is that investment performance
was determined by the investor,
not by the market.
Studies have demonstrated that by missing out
on a few of the best performing days in an index,
investors' overall performance will suffer significantly.
Take the ASX 200, for example,
where investors who missed out
on the best 30 days of return
would've made a return of around 14%,
much lower than investors who would've achieved 324%
if they held the index over the last 30 years.
To help you maintain a sense of levelheadedness
in the current market condition,
you can begin by asking yourself two key questions.
One, is this pullback normal,
like many we have seen throughout history?
And two, do my financial objectives remain the same?
If the answers to both of these questions is yes,
the pullback shouldn't warrant any wholesale changes
to your investment approach.
Sticking to smaller adjustments, if any,
may be more appropriate.
Here are a few strategies that investors can look to
in order to maintain a disciplined investment approach.
Diversification is your best form of risk management.
Markets typically recover.
Individual stocks may not.
As such, investors need
to appropriately diversify their portfolios.
While a single ETF can provide exposure
to a blend of different securities,
it is also important to hold a blend
of different asset classes, regions, and sectors,
which can suffer or benefit
depending on different market environments.
Know your risk tolerance and timeframe.
There is generally a trade-off between risk and return.
Typically, the lower your risk,
the less you should expect in return.
Knowing your risk tolerance
is key to constructing your portfolio
and should determine your mix of asset classes.
Typically, the longer your time horizon,
the more risk you can take
as you have more time
to weather periods of negative return.
Contribute periodically.
While it's extremely difficult to time markets,
contributing on a regular, periodic basis
using an investment approach such as dollar cost averaging
can have great benefits.
By sticking to schedule,
you will buy dips as well as buying at highs,
assisting in reducing your overall volatility.
Markets can seem scary at a time like this,
but they do bounce back.
And in order to achieve success,
investors need to have an investment plan
and stick with it.