From time to time, Morningstar publishes articles from third party contributors under our "Perspectives" banner. Here, Alex Riley, director at independent financial planning firm Bunker Riley, shares the top five tips he has given his clients during this August’s market turbulence. If you are interested in Morningstar featuring your content, please provide your details and/or submit your article here.
“In the short term the stock market is a voting machine, in the long term it is a weighing machine.” Economist, Benjamin Graham.
The ongoing trials and tribulations of the global stock market are certainly a cause for concern and an explanation of the various reasons for the recent volatility are readily available elsewhere by more eloquent journalists so I won’t go into that detail here. The reason for this short commentary is to provide some focus and reassurance to investors who have already arranged their portfolios with a game plan and asset allocation in mind. The quote above tries to help investors remind themselves that in the short term, markets move, sometimes irrationally, based on news, spin, politics etc. But in the long term markets usually return to the fundamentals. For example is Astra Zeneca (AZN), the FTSE 100 blue chip pharmaceuticals company, really worth 10% less today than it was at the end of July? Has there been a change in their fundamentals to cause this change over the last week? I’m not an individual stock analyst but I would probably say no.
Talk of political wrangling in the US and Europe, sovereign debt issues and fears of further recession all contribute to the uncertainty and it is this uncertainty that causes the volatility. Much like watching a horror film it is the fear of the unknown that is the scariest part and our psyche goes into overdrive, it is not what is actually seen on screen. At
times like these the herd panic and psyche takes over, but for investors there are a number of points to remember to help them try to stay sane, tune out some of the noise and remain focused on their original objective.
1. If you have followed a financial plan, then sufficient levels of cash should already be held in reserve for shorter term requirements. If this is the case, then you should not be dependent on access to your investment portfolio right now.
2. If you still maintain an investment horizon over a number of years from today, it is important to remember that it is the value of your investment in the future that is key and not the value today.
3. Making the assumption that your portfolio is falling at the same rate as the various global stock markets reported in the media also assumes that you are invested 100% in those markets. In reality most investors following an asset allocation plan will have capped exposure to the stock market, therefore if your portfolio is allocated 50% stocks and 50% bonds then you will have approximately half the exposure to any stock market volatility.
4. Selling now would trigger an actual loss rather than what is currently a paper loss and if you sold now where would you put the receipts to enable you to recoup any losses?
5. Markets move quickly as we have seen in the last two weeks or so. If and when a recovery comes it is also likely to be swift so market timing, trading in and out, could leave you even worse off if you get it wrong.
It is perfectly natural and understandable to take fright from the current volatility however the key to traversing the current problems is to not panic, take a step back to calm your thoughts, remember your original reasons for investing and only take action if is absolutely necessary for you to do so. Sometimes it might even be worth turning the television off if it spares you from taking the wrong action.
