Investing through market uncertainty
By Luke Kidd
We understand how difficult it can be investing through periods of high investment volatility and global uncertainty. It can be quite discouraging to see the cost of living continue to rise at a time when investment markets seem to be treading water, as they have been doing for a few years. Investors generally understand that investing requires a long-term perspective, however there are always periods when investor patience is tested.
Indeed, over the last few years we’ve faced a challenging time for all types of investors—from conservative to growth-focused—with the market presenting a mix of ambiguity and only selected opportunities for growth. We’ve endured a major reset in the economy, with higher interest rates causing a big change in sentiment. Even defensive-minded assets like bonds have experienced uncertainty. But it’s important to remember that it is precisely in such periods of volatility that the seeds of future growth are often sown.
Historical perspective
Looking at historical investment data can provide some useful context for how we invest today. In the chart below, we can see that global stocks have been positive in 26 of the last 36 years, with 7% gains on average excluding dividends. However, in every single one of these years, we’ve seen a decline (the red dots) and the average decline has been around 15%. So, it’s extremely normal for the markets to misbehave as they trend higher. The key takeaway from this chart that market setbacks are a normal part of investing and are the price you pay for healthy returns.
Finding opportunities
There can be an upside to market turbulence– during periods of high volatility, disruption and price dislocation, active investment managers have more opportunities available to buy assets at attractive prices and to build in higher yields in fixed income markets. Being able to identify and take advantage of these opportunities is what allows active managers to outperform the market, as we explored in our recent article here.
Diversification
When thinking about portfolio construction, diversification remains one of the best antidotes to help mitigate risk. It can be something of a cliché, but it is for good reason. By spreading your investments across multiple economies, asset classes, market sectors and investment strategies you can avoid the risk of higher losses that could occur if you are concentrated in a particular sector of the market that underperforms. Diversification helps smooth out returns and increases your chances of capturing market upsides as described above.
Having the right mindset
Investing looks and feels like a logical and practical exercise, however an investor’s emotions and psychology can significantly affect portfolio outcomes when they drive investor’s decision-making process. Human beings are subject to many different cognitive and emotional biases. There are too many to cover in this article however the loss aversion bias is one of the most significant. Humans tend to outweigh bad news compared to good news and for this reason investment losses can loom much larger in our minds than investment gains. For this reason, our investment philosophy values the use of third-party expertise to help take emotion out of the investment process. However, investors still need to maintain the right mindset to stay invested through difficult periods as well as the good times. One of the simplest ways to achieve this is to tune out the noise of the daily news cycle, focus on the fundamentals and to trust in the long-term process.
Uncertainty is Difficult, but Patience Pays
Remember, investing requires consistent effort, discipline, and the ability to ride through the highs and lows. Our long-term economic view remains positive, and we believe there are opportunities for growth across many investment markets.
We will continue to share valuable insights that will aid you in making informed decisions, keeping your long-term financial goals in sight. If you’d like to discuss any of the above, please don’t hesitate to reach out.
Luke Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001242685)