How to hold your nerve in volatile market conditions
19 Jul, 2022

Globally, stock markets have fallen early in 2022, driven by news of a possible military conflict in the Ukraine and fears that the US’s central bank would raise interest rates several times this year. Investors will be feeling these news stories in the performance of part of their portfolios. In these moments, it can be tempting to sell all or part of an investment to cut losses and avoid a further fall.

But Nico Katzke, head of portfolio solutions at Satrix Investments, says holding your nerve in market downturns will stave off unnecessary losses and allow investors to realise long-term investment goals.

“Financial markets go up and down; they always have. Fluctuations are caused by various factors, mostly driven by investors’ sentiment. For instance, when the pandemic struck, markets declined sharply, largely due to investors fearing the impact Covid-19 would have on economies and markets the world over. However, last year we saw a sharp recovery, which meant that those who had sold due to fears of losing their investments missed out on a strong recovery to levels higher than they were pre-Covid-19.

“This is one example, but the list goes on. The 2007/8 subprime housing crisis, the 1929 and 1987 bear markets. Each time, the market recovered to higher or close to higher levels than before the crisis. It is important to keep in mind that selling during a downturn locks in losses; those who held their positions during recent market corrections incurred no losses. In fact, market corrections can offer investors an opportunity to increase market exposure at a reduced cost.”

Source: Satrix, 25 January 2021

Katzke says it is understandable that investors feel nervous. “For investors who are newer to investing or those managing their own portfolios– for example through the SatrixNOW platform – it is unsettling to see ETFs or unit trusts declining. It is, however, important to remember that long-term wealth creation requires consistency in building exposure to the market – while not being swayed by short-term price fluctuations. The adage of time in the market, not timing the market – certainly holds true.”

Here are some important reasons to hold your nerve and keep an eye on the long-term prize.

1. When you feel nervous, look to the past

There can be great comfort in realising that what is happening now to prices is a normal part of the world’s stock market cycles. Consider the earlier chart which shows that the current volatility experienced is not unprecedented. History shows that a drop in your portfolio’s value is quite likely to be followed by a new peak once the recovery happens. While the timing of any recovery isn’t certain, the trend has not disappointed so far. If an investor chose any random day in the past 25 years and invested R100 in the All-Share Index, the odds of them not losing money when holding it for one year is above 80%. While losing money on an investment is certainly painful, the longer-term cost of not building exposure to financial markets, while not felt as acutely, is significantly higher.

2. Remember investors look for ‘deals’ leading to market corrections

A big part of the reason we can feel so sure of recovery is simple economics. Investors love a bargain, and a market drop means a drop in the prices of stocks. Professional investors look to buy stocks that are well priced and offer value. They’ll start buying strongly when they believe the time is right and the markets recover. This is a bit simplistic in a very complex world, but you get the idea.

3. Consistency is everything

Building a portfolio that creates long-term wealth is all about consistency. The importance of setting part of your budget aside to grow exposure to capital markets, particularly through equity market exposure (which has shown to deliver most over time), cannot be overstated. If you, for example, add R1 000 exposure to the market through well diversified, low-cost ETFs on SatrixNOW – you should be indifferent to current market movements. If markets go up, your portfolio grows. If markets fall, you are buying cheaper access. In the long term, consistently building this exposure through cycles will enable you to grow your investments.

4. Try not to obsessively watch your app

The final tip is to keep your app checking to a minimum. Logging in once a month or every second week is advisable, otherwise, the price fluctuations can be discouraging. Keep your wits about you and hold your nerve!

ENDS

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