Three things investors should avoid doing in volatile markets
When markets turn as volatile as they have lately, investors may be tempted to do things that they wouldn’t in quieter times, especially if they think they can claw back some short-term losses. So, in the video that accompanies this script I explore three common mistakes that I would urge you to avoid making.
Giving up on equities
With the S&P 500 down something like 30% at the time of writing, some people will be thinking about throwing in the towel on shares altogether. However, history reveals the reason why this is unwise. A glance back at the huge bear market of the early 1970’s, when equities lost around two-thirds of their value, shows that for a while at least things were worse then than they are now, so far.
Indeed, a few years after this horrible downturn started, a £25,000 investment would have been reduced to less than £9,000.
Yet, take a wider look at shares over a longer time horizon and it becomes clear that a strategy of abandoning the market would have been a mistake.
Not only did the market recover but it went on to climb far beyond its former levels. And whilst no-one can predict the future, it seems reasonable to conclude that we are likely to see something similar happen again once the current uncertainty lifts.
Trying to time the market
Anyone who sold equities ahead of this downturn will be feeling pretty smug. However, it would perhaps be wiser to be feeling lucky instead. Market timing is always easier with hindsight! The problem with being to trigger happy when it comes to shares is that, in order to make decent returns over the long-term, you need to also catch the upticks. And, as a rule, these tend to follow the biggest drops as well-known studies by the likes of JP Morgan have revealed. That is what makes market timing so tricky.
Naturally anyone wondering how to invest right now will be nervous of committing big lumps of cash at a time when the market could dip sharply. So, a better approach is to drip-feed money in. In volatile conditions, this usually results in a better outcome as the following slide shows.
Being too clever
Another danger during times like this is for investors to persuade themselves that an exotic product, which attempts to capitalise on falling prices, might be the way forward.
An example would be an inverse ETF – a fund that moves in the opposite direction to the market. But whilst this may seem on the surface like a good idea, the reality can be rather different. By way of example, here is the result you would achieve with a 2 X inverse ETF. Thanks to the fact these products are repriced daily, you could see the market fall slightly and something like this fall further still – hardly an intuitive result!
The bottom line is that whilst all of the media noise around volatile markets can make investors think that they should be “doing something”, as one analyst put it a better bet is to treat your portfolio as you would your face at the moment and leave it alone. By all means, discuss your positioning and be prepared to rebalance to achieve the right overall weightings. However, beyond that avoid wasting money on rash, or exotic, trades.
To find out more
Please speak to an Adviser to discuss your investments, or email me on [email protected] if you have specific queries relating to the video that accompanies this script.