13 May Staying passive is being active In volatile market conditions, not doing anything at all – staying the course – is generally the best investment strategy overall.
Heightened global markets volatility – as we’re experiencing right now – can easily trigger kneejerk reactions by panicked investors.
Widespread selling, triggered by the Russia-Ukraine crisis, has been behind the recent big swings on global financial markets, including on stock markets, commodities markets, and currency markets.
As serious as the current events are, heightened markets volatility is nothing new. Think back to around this time two years ago when the onset of the COVID-19 pandemic also triggered major falls on global markets.
In March 2020, the Australian share market dropped more than 35 per cent over about 20 trading sessions to reach its lowest level in more than a decade.
Very soon after, it and other global financial markets staged a quick and very strong rebound.
By the end of 2020 share markets were back near record levels, and last year they continued to build momentum.
Those investors who didn’t panic at the time, and who chose to ride through all that early 2020 markets volatility, and who have remained invested ever since, have been well rewarded with both capital and income growth over time.
In volatile market conditions, not doing anything at all – staying the course – is generally the best investment strategy overall.
Three mistakes to avoid during a downturn
1. Failing to have a plan
Investing without a plan is an error that invites other errors, such as chasing performance, market-timing, or reacting to market “noise” driven by media headlines. Such temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.
2. Fixating on losses
Market downturns are normal, and most investors will endure many of them. Unless you sell, the number of shares you own won’t fall during a downturn. In fact, the number will grow if you reinvest your funds’ income and capital gains distributions. And any market recovery should revive your portfolio too.
3. Overreacting or missing an opportunity
In times of falling asset prices, some investors overreact by selling riskier assets and moving to government securities or cash equivalents. But it’s a mistake to sell risky assets amid market volatility in the belief that you’ll know when to move your money back to those assets.
Time in the markets is what counts
Trying to time markets is virtually impossible. Just being invested in the market, and making ongoing contributions, will ensure you never miss out on long-term growth.
** With thanks to Vanguard