Our hearts go out to the Ukrainians currently experiencing such horrific, dangerous and fearful situations that remind us all how much peace and safety matter.
Major global crises like this often come with such devastating and long-lasting consequences for humans that it’s easy to assume the financial impacts will be enduring too. Stock markets react almost instantly and if news is uncertain or negative, then they are likely to plummet. We’ve seen this in the past with election results, Brexit and the pandemic.
We’re experiencing a situation like that right now, and it is unsettling to think of the impact on carefully made investments. But what investors need to know is that markets are incredibly resilient and can often be quick to recover.
Here are some tips to coping with the current uncertainty:
Sit tight with a long-term strategy
Humans are primed for action: if a sabre tooth tiger is approaching, you run from it, if there’s a bear looming over your baby, you fight it off. Under threat, our natural reaction is often to do something. On hearing the news that stock markets are suffering, it is an easy instinct to think ‘I must move my money’. In fact, it’s a time to sit on your hands. Shifting your investments at a volatile time like this is very likely to lead to substantial losses – situations are too quickly changing and there just isn’t enough information to make accurate decisions.
We are long-term investors, typically planning for a minimum of ten-years, and taking this approach means that any immediate volatility in the markets may not prevent you reaching your longer-term goals.
REMEMBER: Despite wars, pandemics, extreme weather or recession, over time markets still produce positive returns.
Don’t try and predict
Predictions are rarely accurate – either in terms of events or market response. Experts have often expected one thing, only for something different to happen. Let’s take the US election in 2016 as a great example of this. Many commentators and shareholders did not expect Donald Trump to be elected president – that was the first point that wrong-footed experts (and might remind you of Brexit). Secondly, fears were whipped up of a widespread Wall Street sell off in response to Trump’s victory – this also failed to happen and in fact, the Dow Jones, S&P 500 and Nasdaq indexes all rallied immediately and closed that day more than 1% higher. 1
Predictions rely not just on being right about what might happen, but also when. If you remove or move funds, you must then accurately time your entry back in, which is very difficult, if not impossible, and in our experience often leads to unfavourable results. It also assumes that the markets have already priced in the relevant information. Not only that, even accurate and timely predictions can be challenging to translate from theory into an actual trade or investment.
REMEMBER: the biggest and best investment brains in the world can’t accurately predict how markets will behave in the short-term, so remind yourself that your strategies are sound and designed for the long-term.
Don’t be scared of headlines
You will see dramatic headlines, telling of crashes, financial catastrophe, and market panic. Big headlines serve to fuel risky investor behaviour, which can then further exacerbate the situation. It’s helpful to remind yourself that news, especially in our clickbait world, is often about hype and worst-case scenarios. Not only can it lack balance, but particularly online, it can be hard to avoid fake news too. And once you’ve clicked, algorithms will keep you supplied with more of the same – it can feel incredibly overwhelming.
It’s wise to try to protect yourself from the media drama however you can. It is not the place to find sound, expert led (boring) financial advice.
REMEMBER: the media is in the business of selling stories, not giving sensible financial advice.
Wait for the bounce back
It’s common that sudden falls in markets are often followed by very sharp recoveries in value. In war situations, this bounce back effect has been evidenced too, as shown by the Gulf War, Afghanistan War, Iraq War and the Crimean crisis.2 Some opportunistic investors seek to capitalise on a market low by buying ‘in a dip’, and this can also increase the speed of the recovery.
REMEMBER: markets are sensitive and responsive, and able to climb as quickly as they fell.
Trust in diversification
Resilient portfolios typically span a range of areas to mitigate risk. Covering a geographical range is the most obvious, but our portfolios also include exposure to a range of assets classes such as bonds and infrastructure which should help to reduce volatility in a crisis.
Nobel Prize–winning economist Harry Markowitz explained in his Modern Portfolio Theory that a diversified portfolio with holdings in a variety of sectors and locations is more likely to be profitable than a less varied one. Ideally, a portfolio should be diversified so as to earn a particular return with the most minimal risk possible. Thus, certain stocks could be offset by others. 3 With recent events, you can see how this theory played out if you were invested in an airline as well as a technology company. As planes were grounded during the pandemic, the technology sector thrived as the online meeting approach became essential.
As this chart 4 shows, looking at the period 1926 to 2018, diversification of portfolio has dampened frequency and severity of loss, whilst still driving up potential for growth compared to the safest option.
DATA SOURCE VANGUARD RETURN DATA FROM 1926 TO 2018.
REMEMBER: our investment portfolios spread the risk to help them remain steady.
Can you help?
Our natural drive for action in the face of crisis can be harnessed more productively than rash investment decisions. It’s hard to know how best to lend support to those in crisis but Save the Children has launched an urgent Ukraine appeal, to raise funds to help the 7.5 million under 18-year-olds who are in grave danger of physical harm, severe emotional distress, and displacement. You can support their work here.
Our key message is that staying invested for the long-term has proven to be the most effective way of maximising returns. At Holden & Partners we take a long-term approach, with a fully global, diversified portfolio. We will be monitoring developments of this situation closely and will take action if required.
We have received lots of positive feedback about our updates. If you’ve found them useful and informative, we would be delighted for you to share them with friends, family and work colleagues. We are always keen to spread the word about our unique approach to financial planning and investing.
Please note that any thresholds, allowances, percentage rates and tax legislation stated may change in the future. The content of this communication is for your general information and use only; it is not intended to address your particular requirements. This communication should not be deemed to be, or constitute, advice. You should not take any action without having spoken with your usual adviser.