Sumayya Davenhill, Head of Marketing at M&G Investing
It’s easy to be concerned about your investments when you’re constantly exposed to bad news through both social and traditional media. But investing is a journey, not a short-term destination; one that requires patience, discipline and a long-term perspective. It’s easy to get caught up in the day-to-day fluctuations of the market, but the key to success is to maintain a focus on the bigger picture.
While it’s natural to feel anxious when the market takes a turn for the worse, it’s imperative to resist the urge to make rash, impulsive decisions based on short-term market movements. Selling your investments during a market downturn can be a costly mistake that can negatively affect your long-term returns.
Market downturns are a normal part of the investment cycle, particularly when investing in growth assets such as equities. If you expect this upfront – perhaps having been prepared by your financial adviser – you will be less likely to react negatively. That being said, market volatility has increased in recent years as a result of events that were entirely unpredictable – such as the Covid 19 pandemic and Russia’s invasion of Ukraine. Adding to this is stubbornly high inflation and rising interest rates, leading to subdued economic growth prospects. Market expectations point towards a continuation of these investment themes driving investment markets for the rest of this year and beyond.
Continued volatility can be uncomfortable, even for the most astute investors, and can lead to a knee-jerk response to switch away from equity to the “safety” of cash to avoid further losses. But selling simply locks in actual losses from market falls that were previously only realised on paper. History shows that when the markets start to recover, those who disinvested miss out on much of the upside because they’re sitting on the side lines. By the time they get back into the market, they’ve lost out on the opportunity, while those still in the market will have recouped some of their paper losses.
Keep calm and carry on
Maintaining a long-term perspective helps you to be better equipped to weather market storms and take advantage of opportunities when they arise. There are surprisingly many occasions when it’s best to do nothing and allow the volatility to play out, since over time equity markets have always eventually recovered and continued on their upward path. As such, the reward from doing nothing could greatly benefit you in the long run.
While it’s useful to be informed about your investments and the broader market by keeping up to date on financial news, do take a balanced approach and avoid becoming consumed by news that is irrelevant to your investment strategy.
Having a well-defined investment plan that reflects your objectives, risk tolerance and overall time horizon can really help you stay focused. If you set a clear time horizon for each of your investment goals, and then stick to that, you’ll be better prepared to remain patient and disciplined, even during market downturns.
Your investment plan should also include a target asset allocation and a rebalancing strategy. By investing in a diversified portfolio of assets that reflects your risk profile and investment objectives, you are better able to minimise risk and volatility while still providing the upside potential for long-term returns. Additionally, a diversified portfolio can help reduce the impact of market downturns on your overall returns.
Alternatively, why not simply invest in unit trust funds managed by a professional investment manager who is much better at avoiding panic during market sell-offs, and instead takes advantage of the opportunities to buy up high-quality companies at cheap prices? This is exactly what M&G Investments did during the market crash caused by the Covid-19 pandemic. As a result, our client portfolios have been reaping the benefits of the recovery in these excellent companies over the past two years, having outperformed the market in general. For example, the M&G Balanced Fund has returned 15.7% p.a. over the three years to 30 April 2023 compared to the 12.4% p.a. average return of its ASISA category over the same period – an outperformance of 3.3% p.a.
In conclusion, the key to success when investing is to keep your eye on the bigger picture. This means having a well-defined investment plan, resisting the urge to make impulsive decisions based on short-term market movements, staying informed about your investments, and keeping a long-term perspective on your investment journey. By following these principles, you’ll greatly improve your chances of building wealth over time and achieving your financial objective.