By Peter Dine – 25 January 2022
It has been a rough start of 2022 for financial markets following a year where many share markets such as the US reached record highs. As an example, the US S&P 500 share market index rose by 27% in 2021 but is down by 6% so far in 2022, and the New Zealand S&P/NZX 50 index is down more than 9% from this time last year.
Feelings of anxiety are likely to be running higher than normal as we battle our way through the complexities and uncertainties surrounding the Covid pandemic. However, it is important not to let this added anxiety cloud our judgement. It’s perfectly natural to feel a bit uneasy when markets fall but when our emotions get the better of us and we reach the point of panic, it can lead to irrational decision making such as cashing up our investments in the fear that markets will fall further.
Those of us who have been around the block a few times will remember the immortal words of Lance Corporal Jones from the 1970s comedy Dad’s Army. “Don’t panic Captain Mainwaring”. These are wise words when investing in turbulent times.
Markets are dynamic and go down as well as up based on a myriad of factors. Right now, the attention is on inflation and interest rates. After been dormant for so long, inflation is uncomfortably high in many economies around the world. Markets are grappling with the question over whether inflation is transitory and the result of supply chain issues caused by Covid-19, or whether inflation is more entrenched. Markets are also trying to predict the actions of central banks including the extent to which they will need to raise interest rates to cool inflation. This uncertainty is negatively impacting share markets, particularly shares that are sensitive to interest rates. On top of this we have ongoing concerns around Covid variants (currently Omicron), geopolitical tensions such as Russia and the Ukraine, and the long running tensions between the US and China.
The reality though is there are always things happening in the world that could potentially unsettle markets and from time-to-time markets will respond by falling. While the timing of such falls is impossible to predict, it is a normal part of markets and investing.
The graph below shows the movement of the S&P 500 share market index from 2008 onwards. For the 14 years to December 2021 which includes the Global Financial Crisis, the S&P 500 grew by a compound rate of 11% per annum. That’s more than a 400% increase. Despite this very good performance, there were 9 instances during this period when the S&P 500 declined by more than 5%, and a further 8 instances when it fell by more than 10%. The most extreme declines were during the Global Financial Crisis when the S&P 500 fell by nearly 57% and in early 2020 when the onset of the Covid-19 pandemic caused a very short-lived decline of nearly 34%.
For patient investors with a long-term investment horizon, these corrections are merely stumbling blocks along the path to success. For investors who want to sell because markets have fallen, they risk crystalising a loss. Then there is the question of what else to invest in or when to get back into the market.
So what should investors do when markets are falling?
- Don’t panic. Markets downturns are a normal part of investing.
- Don’t try to time the markets. Its impossible to pick the top or bottom.
- If you have a well thought out investment strategy aligned to your financial goals, stick with it. Often the best (and hardest) course of action is to do nothing.
- If you are unsure whether your investment strategy is right for you, speak to your financial adviser. If you don’t have a financial adviser or want a second opinion, a Saturn Financial Adviser is here to help.
- Ensure your investments are well diversified across asset classes, geographical regions and currencies. It won’t necessarily protect your portfolio from a market downturn, but it will help mitigate the failure of individual investments and help reduce the volatility often associated with very concentrated portfolios.
The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances