Share markets across the globe have exhibited high volatility over the last couple of weeks, leading to negative returns for some indices.
Inflation is rearing its head in the US and also Australia (pointing to the prospect of higher interest rates), oil prices are escalating and there is the threat of war in Ukraine – these have all weighed on investors’ minds.
Retail investors (particularly novice investors, which now make up a big proportion of the investor landscape) typically get scared by wild market fluctuations and tend to sell when the market retreats.
This leads to the common scenario where many investors buy high and sell low.
So, rather than getting scared by market volatility, and acting on emotions, investors should follow some strategies to get through these volatile times.
Diversification is a proven way to beat market volatility as different types of investments and assets typically behave differently under different market conditions (to a degree at least). For example, if you only invest in Australian shares and ignore international shares and bonds, you are only exposed to a single market and thus a higher degree of risk.
Focus on the long-term
Share markets are volatile by nature and any type of share investment should always be made with a long-term view of 7-10 years. During that time there might be wild fluctuations, but in the long-term shares should outperform cash and other conservative assets classes. So, any paper losses during a market correction may get reversed once markets recover.
Rebalance your portfolio
Make sure you are not overexposed to one particular area or stock, and check that your risk profile is still consistent with your portfolio. When markets go up, you typically become over-exposed to shares, which means you will get hit harder when markets drop.
Quality is important
Quality or blue chip assets should recover, whereas more speculative shares or assets may become worthless. Make sure that you understand what you are invested in and that you are still comfortable it will be a good long-term investment.
Don’t make emotional decisions
Sometimes not doing anything at all might be the best thing for you. I have seen people sell investments based on fear at the lowest point, only for the market to recover the very next day, leaving them paralysed, being too scared to buy back in.
If you are a long-term investor, and your risk exposure and investments are still appropriate, you should not have to worry.
During times of volatility, it is easy to get carried away by your emotions and market sentiment. But rather than making emotional decisions that may prove to be costly, take a step back, seek professional advice where you can and make a fully informed, rational decision.
Please contact us if you need any help.