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First things first, the investment markets are not in freefall. In fact, investment markets have been calm for the last number of years. So much so that some investors may have forgotten how frightening economic crises can be.Looking at past economic crises, we can see that the markets have never told us precisely when, where or how steep their short-term movements were going to be. But, they have reliably recovered and soared – usually without warning. Those who did not panic-sell at the bottom and then try to guess when it might be “safe” to return were ultimately rewarded with healthy returns.So let’s pretend we are in a state of emergency, with the following fire drill. Here are 6 timely actions you can take when financial markets are tanking, and, hopefully, even when they’re not.
It’s easy to believe you’re immune from panic when the financial sun is shining, but it’s hard to avoid the ‘world-is-going-to-end’ news headlines during a crisis. An emotional decision made at the height of a crisis is likely to be an expensive one. Even if you only pretend to be calm, that’s fine, as long as it prevents you from acting on your fears.
We do know that history tends to repeat itself. History tells us that from 1900 – 2016 the markets have experienced a correction about once a year. Therefore, there are pretty good odds it will happen again. A market correction is when the markets decline by at least 10%. One way to ignore the doomsayers during market corrections is to heed what decades of practical evidence have taught us about investing: Capital markets’ long-term trajectories have been upward. Thus, if you sell when markets are down, you’re far more likely to lock in permanent losses than coming out ahead. Stick with the plan.
There’s a difference between following current events versus fixating on them. In today’s multitasking, multimedia world, it’s easier than ever to be inundated by breaking news. This ‘breaking news’ can make it difficult to retain your long-term perspective.
Review your investment portfolio regularly
When you planned your personalised investment portfolio, it was carefully structured around your lifetime financial plan. Typically, your investment portfolio should be globally diversified, allocated to various sources of expected returns, and sensibly implemented with a low-cost approach in an evidence-based manner.“The key to successful investing is to get the plan right and then stick to it. This means acting just like the lowly postage stamp that does one thing but does it well. It sticks to its letter until it reaches its destination. The investors’ job is to stick to their well thought out plan (if they have one) until they reach their destination. And if they don’t have a plan, write one immediately.
When you create a personalized investment portfolio, you also commit to accepting a measure of market risk in exchange for those expected market returns. Unfortunately, during quiet times, it’s easy to overestimate how much volatility you can stomach. If you discover you’re miserable to the point of breaking during even modest market declines, you may need to re-think your investment plans, post-recovery.
If, on the other hand, you discover you’ve got nerves of steel, market downturns (when the market flips from a bull to a bear and values drop more than 20% for a longer period of time) can be opportunities to buy. This is not for the timid! This approach is implemented if you are investing with your long-range lifetime financial plan in mind and puts you well-positioned to make the most of the expected recovery.
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