Wealth ManagementInvestment Advice

What you can do in a turbulent market

Craig Smith
7 July 2022
5 min read

7 July 2022

Financial markets rise over time, but not all the time. This is certainly the case in 2022 so far, with virtually all asset classes in decline and investors of all risk tolerances suffering losses.

The week ended 17 June 2022 saw the world’s largest stock market – the US – pushed into a ‘bear market’. A bear market is a normal part of investment markets and is defined as a fall of 20% from a recent high. There have been 12 bear markets in the US since the end of World War II, with the latest one in 2020 lasting only 33 days. Before this was the Global Financial Crisis (GFC) of 2007-2009, which lasted a year and a half and the dot.com crash of the early 2000’s which lasted 2.5 years. Despite these market declines the S&P500, as a measure of the US stock market, has averaged a 10% p.a. return since 1990.

Risk is a feature of investment markets which is the reason investors can earn a premium, by holding higher-risk assets such as shares and property over the long run. Although gaining returns are neither smooth nor guaranteed for short periods, over the long-term investing your hard-earned money in riskier assets is the only way to keep it growing above (or at least) the rate of inflation and avoid it shrinking in value in real terms.

It is easy to lose that long-term mentality of investing when volatility rises and markets fall, regardless of why. We are prone to panic and can fall into the belief that what is happening now, will continue forever. With that panic comes the urge to sell and locking in short term losses can be disastrous for an investors long term position and their ability to meet their long-term goals. On the other hand, panic can create opportunity, and if you are a long-term investor, you can be a buyer of opportunity, not a seller.

As an example, if you fled for the exits in mid-March 2020 when the pandemic emerged (as many investors did), you would have missed some significant gains, depending on whether and when you re-invested in the market.

Unfortunately, there is no ringing bell at the bottom of the market. The following chart illustrates the difficulty of finding a new entry point once you leave the markets. If you had stayed invested for the entire two years of the pandemic, you would have seen your $100 investment on 1 January 2020 rise to $133 by the end of 2021. But if you had moved to cash in March 2020 and then returned to the market a few months later at the end of the second quarter, you would only have $107 by the end of 2021. Meanwhile, if you moved to cash in March 2020 and stayed in cash until January 2021, you would have only $94 at the end of 2021.

This is where we believe that Findex Financial Advisers can be a valuable guide. Our role at times like this is that of a coach, we are here to keep you focused in a volatile market and continue making decisions based on your long-term goals.

Fear impacts opportunity

Source: Russell Investments, Morningstar Direct. Balanced Portfolio 60% S&P500, 40% Bloomberg Barclays Aggregate Bond. As at 31/12/2021.

In 2022, we are again faced with this challenge as investors. Concerns have emerged due to inflation, rising interest rates, geopolitical tensions, and a possible economic slowdown. Worrying about these things is normal; the key to successful investing is heeding the lesson we have learned countless times throughout market history. The biggest mistake an investor can make is turning temporary volatility into a permanent loss. It is forgetting that falling share prices, just like rising share prices, are a normal part of investing in a share market.

The chart below shows the impact of missing some of the best days in the market. As you can see, even by missing the best 30 days over a period of ten years you have reduced your return from $462,575 to $151,292.

Difficulty of market timing

Source : Russell Investments, Morningstar. Returns in USD. Based on S&P500 Index for a 10-year period end 31/12/2021.

So, what can you do at times like this?

Reassess your true risk tolerance.

Times like this bring out our true tolerance for investment risk and volatility. When markets are rising, we are often surprised at how confident clients are when assessing their risk tolerance, noting they could withstand a fall of 20% or 30% before they would begin to get concerned. When you see your investment values falling you will find out if this is truly the case. But it is not just your risk tolerance to consider; it is also your risk capacity. If you have a long timeframe or more money than you are likely to need in retirement, your risk capacity can be higher and falls in the market can provide you with opportunity. It is also important to consider how and when a change in tolerance is implemented.

Revisit your savings ability.

Can you increase your savings and investment to make the most of reduced market prices? Whatever you buy today is likely to be at a discount from levels at the beginning of 2022. Finding the exact bottom is not a realistic goal, however investing additional funds evenly throughout a market downturn can be a suitable approach.

Stay Invested!

The best advice at times like this is to do nothing. We cannot control the markets but can control our frame of mind, stay logical and learn from past market cycles.

“The first rule of compounding is to never interrupt it unnecessarily.” – Charlie Munger.

Here at Findex we have extensive experience and knowledge in wealth management and can provide you with advice, support and guidance with your finances and investments. Contact us today to speak with one of our financial advisers and get you on-track with your long-term goals.

Author: Craig Smith | Partner

Craig joined Findex in 2017 through the acquisition of Wealth Works, where he had been providing clients with investment & financial advice since 2010. Prior to that Craig was advising clients of another Auckland based accounting firm. Craig is the Adviser Representative on the Findex New Zealand Investment Committee, ensuring that the voice of clients is well considered in all decisions. He is committed to providing well rounded financial advice for all clients. He takes a holistic approach and considers all elements of a client's financial and lifestyle situation before developing strategies to achieve their goals.