Conrad Clifford, Warwick Wealth Director and Regional Manager, KZN
“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.” Charlie Munger
The current market turmoil may have some investors feeling like they should sell and wait on the sidelines until all settles down. Inflation, political issues, the war in Ukraine and Covid recovery, are all issues of concern. But are these matters that will permanently change world markets and does this mean that we have to re-think everything we know about investing?
Certainly not and, in fact, we can rest assured that the current challenges are just that, the current ones.
The US market is a fair barometer for world markets, so looking back at the Dow Jones over the last 50 years, there have been many events that would have had investors feeling concerned about their investments when the markets suffered sharp declines. Let me highlight just a few that you may recall from the history books or maybe in your own investment journey.
1972 Watergate: Dow Jones down 50%
1980 -1982 Recession: Dow Jones down 16%
1986 -1989 Chernobyl, financial panic, Lockerbie, US invades Panama: extreme market volatility
2007 Sub-prime mortgage crisis: Dow Jones down 46%
2018 US trade War with China: Dow Jones down 13%
2020 Covid19: Dow Jones down 36%
Through all of these events, the prudent decision to take regarding your investments was to sit tight and not panic. A correctly structured portfolio will be diversified enough to enable you to draw on cash holdings when you need it and retain the more volatile equity assets to participate in the market recovery. After each and every event, there has been a return to growth.
We are currently in the midst of a sharp decline in global markets, which has investors feeling jittery again. The Dow Jones has declined by 25%. Rising inflation and interest rates are placing pressure on consumers throughout the world, which, in turn, places pressure on stock markets. Yet, investors should remain forward-looking, as it is not the current conditions, as much as those expected to prevail in 12 months, that guide the direction of the stock markets.
The markets are currently focused on when inflation will peak and hence when interest rates will decline again. The irony is that this is being done during a time when interest rates will surely continue to rise over the next several months. So, listen out for comments about inflation peaking and interest rates rising less than expected. Subtle positive sentiments can lead to gradual improvements in the market that one may miss while waiting for the ‘big turnaround signals.’
Notably, one of the most destructive actions an investor can take is to try to time the markets. Exiting the market and hoping for more favourable conditions results in what has been coined ‘behavioural tax’. This ‘tax’ is incurred when you miss out on those positive market movements, which generally occur after the market has suffered notable losses. A recent example was on 24/03/2020 when the one-day gain on the Dow Jones was 11,37%. You surely want to participate in gains like this.
In conclusion, at Warwick Wealth we are not immune to market declines, but seek to diversify your portfolio and limit the downside, which protects your capital and also enables an easier return to positive returns.