In the world of investing, it is important to stay calm and not worry.
In recent months, markets have been volatile as tumultuous current affairs reverberate through global stock indices. It might seem concerning, but take note of two important pearls of wisdom from Warren Buffett: “Risk comes from not knowing what you’re doing” and “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.
If you haven’t heard of Buffett, he’s probably the most successful and influential investor on the planet. He’s one of the world’s richest men and he agrees with us on how to approach investing.
A well-diversified, low-cost, and evidence-based portfolio can help you navigate the ebb and flow of the markets and stay on course to meet your long-term goals.
It should also be noted that unstable markets don’t necessarily equate to greater risks for investors, especially if you’re already working with a financial planner. In fact, they may even offer opportunities.
Read on to discover three simple reasons why you shouldn’t worry too much about short-term market downturns.
1. A carefully managed portfolio is likely to be well-diversified and not exposed to individual market dips
A good financial planner is likely to build a portfolio of investments for your funds that is well-diversified across different assets and markets.
This is done specifically to reduce your exposure to risks and ensure that, even during short-term periods of market downturn, your overall portfolio is likely to stay on track towards reaching your long-term goals.
2022 was considered an especially volatile year for stock markets around the globe.
The table below details the performance of some of the world’s leading stock indices in the year to the end of 2022.
Source: JP Morgan
The data shows that stock markets can be particularly volatile, especially during periods of high inflation and rising interest rates. Nevertheless, despite many indices seeing annual declines, the UK’s FTSE All-Share saw slight growth for the year.
It is important to note that stock indices don’t always relate to the greater economy or even the performance of all listed companies. Instead, they typically refer to a selection of businesses or assets that are used to broadly track how the overall market is performing.
2. A smart investment plan focuses on long-term outcomes over short-term trends
A financial planner aims to understand your background, tolerance for risk, desired lifestyle, and long-term goals before developing a plan to help you reach your objectives.
This plan accounts for the likelihood of periods of instability. It is designed to navigate the short term and keep you on track over the long term.
At Grey Parrot, we achieve this balance by adopting an evidence-based passive investment strategy. This is sometimes known as a “buy-and-hold” approach, and aims to select investments to be retained over the long term.
Passive investing has several benefits including:
- Fewer additional costs and fees
- Less time needed to manage and oversee investments
- Higher compounded returns throughout your investment timeline
- Reduced exposure to Capital Gains Tax liabilities
- A simplified and more transparent portfolio
- An overall reduction in associated risks.
Remember: Investing is best viewed as a patient, long-term strategy.
It is crucial to note that very few active fund managers outperform the market in the long run. In fact, a study by the Financial Times analysing the performance of 800 investment funds over the course of 2022 showed that only a third performed better than passive index trackers.
Markets may ebb and flow in the short term, but over longer periods they are likely to see growth.
For example, IG reports that, for any 10-year period the FTSE 100 traded between 1984 and 2019, there were median annual returns of 8.43% with dividends reinvested. If your goals are long term — and you are calm and patient — then short-term volatility provides little risk.
3. Market downturns can actually offer investment opportunities
It can be natural to find sharp market dips to be concerning. The human brain is psychologically hardwired to fear the potential for loss. It is a bias known as “loss aversion”.
The theory proposes that human beings typically feel the anguish related to losses twice as intensely as the thrills of gains.
This can push nervous investors to make emotionally driven decisions that may be harmful in the long term.
You may hear the words “sell, sell, sell” echoing around in your head and decide to part with your investments, effectively turning any paper loss into an actual one and removing any possibility of your investments bouncing back in the future.
As much as a market downturn can feel like doors are closing, it could end up pushing new ones open, as a range of investment opportunities present themselves across a declining marketplace.
Solid companies that typically see growth over the long term, may be priced lower than usual, and so offer an investment option at a lower cost that could see significant returns in the future.
It is a lesson that Buffett knows all too well and one that you should keep in mind whenever you see markets dip. Working with a financial planner can give you a frequent reminder and ensure that your financial plans aren’t tied to the short term, but instead focus on the long run.
Get in touch
If you are worried about your investments and are unsure of the best way to reach your long-term goals, a good first step could be reaching out to a financial planner.
Contact us by email at info@grey-parrot.co.uk or call us at 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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