For long-term investors, dealing with volatile markets can be taxing and at times quite frightening. The accumulation of Pension & Non Pension Capital has taken time and effort with a desire to ensure positive as opposed to negative growth is achieved on same. Here are some points you may want to consider in such Market conditions, as prevailing on the 1st Quarter of 2016. None of these should be new to you, but they are particularly important in a turbulent environment, which is where their true value is realised.
1. Don’t panic — When Investment markets become volatile, the gut reaction for most of us is to panic — to buy when everyone else is buying (and when prices are high) — and panic sell on the downside (when prices are depressed). Panic selling also runs the risk of missing the market’s best-performing days. Consider, for example, an investor missing the top 20 performing days of the S&P 500 in the last 20 years would have reduced the average annual return from 9.79% to 3.58%. Whilst not advocating 100% allocation to Equity, this point highlights the necessity to ensure correct Assets and Allocations are held within a Portfolio and also an understanding that returns WILL be both positive and negative over time.
2. Pay attention to asset allocation — During volatile times, riskier asset classes such as Equities tend to fluctuate more, while lower-risk assets such as Fixed Interest Bonds or Cash tend to be more stable. Ensuring a balanced and risk adjusted structure to your Portfolio will entail a greater ability to ‘weather ‘volatile market conditions. The necessity for regular reviews of your holdings will ensure a clear and transparent understanding of the risks being undertaken.
3. Diversify, diversify, diversify — In addition to diversifying your portfolio by asset class, you should also diversify by sector, size (market cap), and style (e.g., growth versus value). Why? Because different sectors, sizes, and styles take turns outperforming one another. By diversifying your holdings according to these parameters, you can potentially smooth out short-term performance fluctuations and mitigate the impact of shifting economic conditions on your portfolio.
4. Keep a long-term perspective — It is all too easy to get caught up in investment market’s daily roller coaster ride — especially when markets turn choppy and its effect on your Investment Portfolio can reflect such movement. This type of behaviour is natural, but can easily lead to bad decisions. Instead, focus on whether you continue to be comfortable with your long-term performance objectives based upon informed and current commentary.
5. Consult with your advisor(s). They can help you develop a long-term investment strategy and can help you put short-term events in perspective. No one is certain what impact current drivers of volatility will ultimately have on the economy and financial markets. But as an investor, time may be your best ally. Consider using it to your advantage by sticking to your goals and ensuring your plan is constantly current.
We hope the above gives some element of direction on how invested Capital should be assessed in volatile conditions. The message we hope to convey is the need for regular review and assessment to ensure Invested Capital is working for you.