Market Corrections – Are They Temporary?
February 24, 2022
Market Corrections – Are They Temporary?
Fact: They are rare, inevitable and are a feature of the markets.
When there is a correction, there are only 2 options you have with your investment portfolio(s)
- Do something
- Do nothing
In life, doing something typically leads to better outcomes. For example, work harder, you are more productive, study harder at school and you get better grades, etc. Investing doesn’t tend to work like this in fact. It is counterintuitive. The odds are stacked against you if you keep tinkering with things, mainly because:
- Increased charges – both explicit and implicit ones.
- The best trading days occur infrequently, so missing out on the best days will heavily determine the outcome of your portfolio.
- The best trading days normally occur after a correction.
These make timing the markets in real-time extremely difficult.
Here are some of the Don’ts that investors should avoid during a correction:
- Forgetting their investment time horizon – investing should be measured over years not months. If you do not sell an asset, it is just a paper loss. It only becomes real if you sell.
- Forgetting their risk profile – you have to accept that markets do not just go up in a straight line, there will be occasional periods where they will go down. Depending on your risk profile, you have to be prepared for the level of investment drawdown over a given period.
- Failing to understand liquidity. Liquidity is a double edged sword. Financial assets have a unique feature that almost no other asset class have, that is liquidity. There is transparency around the pricing of the financial assets and the frequency to trade is seconds, if not daily. You have got to recognise this feature and make good use of the flexibility it brings. With this level of transparency, it inherently brings volatility. Some clients have told us that they check their portfolios every few days and I know it is those clients that tend to react whenever the markets experience a small tumble.
- Failing to stick to your financial plan.
- Thinking that “this time it’s different”. Just bring up a total return index chart, where dividends are factored in. One example is the German DAX. We have had wars, financial crises, terrorist attacks and a global health pandemic, all causing significant disruptions. In how your portfolio & financial plan is designed, you should be confident that the odds are stacked hugely in your favour. Where there is a wobble, there will be an imminent bull market (a market where prices are rising or expected to rise) within the capital markets.
- Failing to realise that bear markets (a market where prices are falling or expected to fall) are getting shorter – You will see that gains are stretched over many years and losses compressed into a few months. It’s short-term pain for long-term gain.
- Failing to recognise that what you see in the media where they reference for example, the FTSE 100 index, this may not be how your portfolio is constructed. It should be far more diversified and appropriately blended to achieve a good level of risk-adjusted return for a particular risk level.
- Failing to diversify.
- Failing to understand defensive assets exist as a form of protection, rather than a driver of returns. A bad year for defensive assets is akin to a bad afternoon for equities.
Risk Warnings:
The information contained in this article is intended solely for information purposes only and does not constitute advice. The price of investments and the income derived from them can go down as well as up, and investors may not get back the amount they invested. Past performance is not necessarily a guide to future performance.
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