Investment 101: How to Cope a Pandemic Driven Depression
With the present high level uncertainty, share markets are volatile and interest rates are falling, declining business and consumer confidence, economic shut downs and investors are worried that their money is safe and concern that their long term goals are no longer achievable.
With a global financial crisis driven by a pandemic, leading to an economic depression the following rules always apply:
Whatever you do … Don’t panic!
You cannot time the market so don’t bother
Long term goals are the only road to success
Stay invested for the long term is best
Diversification is paramount in protecting your capital
It is 30 years since Australia last experienced a recession, so for many investors where to put money during a recession isn’t something they’ve had to think about before. We understand you are probably concerned about your investments and wondering what to invest in. Volatility isn’t something investors like at all. The pain of losing is significantly more powerful than the pleasure of gaining, which makes us more likely to overreact during market downturns than when the market is booming.
Here, we’ve outlined some sound strategies you should adopt:
Don’t Panic and staying positive during market downturns
Stay strong and ensure your investments remain aligned to your investment goals. The most important thing you can do during market downturns is not panic.
Invest for the long term
If you’re a long-term investor that is, a time horizon of 10+ years, never let emotion get in the way of sound decision making. Selling out of your investments and moving to cash may seem like a safe option, but you will be potentially crystallising your losses and missing out on any opportunities that could arise in the future. Seek good financial advice at the start, so you have a plan to realise your investment dreams, leaving you able to have peace of mind.
Volatility does not necessarily result in poor investment outcomes, but can present opportunities. The principle of investing regularly, regardless of whether the market is rising or falling, allows you to buy more of an asset when prices are low and buy less when prices are high. This in known as “dollar cost averaging”, not only will this average out over the long term, resulting in a better average price for the assets, but you’ll also potentially hold more of an asset, which will be beneficial when prices rise again.
Use Common Sense & leave the decisions to the Professionals
Market timing is an investment strategy used to try and ‘beat’ the share market by predicting its movements and buying and selling accordingly. It’s the exact opposite of the long term ‘buy-and-hold’ strategy, where an investor buys shares or assets and holds them for a long time, designed to ride out periods of market volatility. According to Morningstar research, investors would need to be correct 70% of the time to get any benefit from an active market timing strategy. This is almost impossible to achieve, even for professionals! You are more likely to miss some of the best days of the market rather than picking them correctly.
Diversify to Reduce Risk
Not only is it difficult to time the market correctly, but it’s also hard to predict which asset class will perform best in any given year. Last year’s best performing asset class can easily become next year’s worst! Many investors choose to manage this by diversifying their investments across different asset classes (shares, bonds, cash etc.) and create a portfolio that’s based on their risk tolerance, time horizon and investment goals. It is important to understand that diversification doesn’t mean you’ll avoid market volatility completely. Even with a well-diversified portfolio, your investments could still potentially experience periods of what you’d probably measure as underperformance.
Stu Varidel and Your Choice Financial Planning Pty Ltd trading as Heart Financial Advisers are authorised representatives of Sentry Financial Services Pty Ltd AFSL 286786.
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