In March 2023, regulators assumed control of Silicon Valley Bank as Investors sought to withdraw their deposits as concerns grew for the stability of the Bank. Within two days, regulators had assumed control of a second Bank, Signature Bank. With anxiety increasing, many investors eyed their portfolios for exposure to these and other regional banks with concerns for all both in the US and around the globe. 

When worrying headlines emerge, many begin to rummage through portfolios looking for trouble. However, the best practice would be to instead turn to the investment plan. Hopefully, the plan is designed with long-term goals in mind and is based on principles that can be stuck to within personal risk tolerances. While every investor’s plan is different, being cognizant of the headlines and focusing on the following time-tested principles may help avoid short-sighted missteps being made. 

Uncertainty Is Unavoidable 

Uncertainty is nothing new and investing will always come with risks. Over the last three years we have experienced a global pandemic, the Russian invasion of Ukraine, coupled with spiking inflation, and ongoing fears around a recession. Investors have faced two ‘Black Swan’ events in three years and three since 2008. While it may have seemed that there were plenty of reasons to panic, the ISEQ from January 2020 to date has returned in excess of 19%, with multiple double-digit declines, during this period. Interestingly, 100% of this return occurred within 2023. If we have learnt anything from the past three years it is that there was certainly a case for weathering short-term ups and downs and sticking with the plan. 

Market Timing Is Futile 

We naturally think about market timing when things are bad and the news warns of worse to come. The idea of employing short-term techniques to avoid immediate loss while forgoing long-term benefits may seem appealing. However, research consistently shows such timing strategies are ineffective. The major hazards of market timing include missing out on upward price movement while waiting for the ideal time and investing at the wrong time because it is frequently difficult to anticipate when a market will shift. Over time, studies demonstrate that buying and holding results in significantly higher returns for average investors with significantly less stress. The consequences of miscalculating your timing strategy may be much greater than the ostensible gains. 

Diversification Is Your Buddy 

A statement famously penned by Nobel laureate Merton Miller, financial diversification and innovations over the last century in the form of Multi-Asset Funds, Investment Notes, ETFs and more now ensure that the majority of investors can access broadly diversified investment strategies at very low costs. While some risks, such as those associated with an economic downturn, cannot be completely eradicated by diversifying, it is nevertheless a very effective technique for lowering money many of the risks that investors can encounter.

Diversification, in particular, can lessen the potential suffering brought on by the subpar performance of a single business, sector, or nation. For example, on February 28, Silicon Valley Bank (SIVB) represented just 0.04% of the Russell 3000, while regional banks represented approximately 1.70%. For investors who maintained globally diversified portfolios, exposure to SIVB and other US-based regional banks was probably significantly smaller. If diversification is part of your investment plan, headline moments can help drive home the long-term benefits of your approach. 

Many investors believe they ought to be managing their portfolios when the unexpected occurs. Frequently, experts and headlines fuel these feelings by foreseeing more dread and misery. However, for the long-term investor, preparing for potential scenarios is considerably more effective than attempting to forecast the future. 

If you are interested in discussing your options further contact our Senior Consultant, Mary Murray.