When markets are down, investors naturally become nervous about the performance of their investment portfolio.
This discomfort is often compounded by murmurings of recession, economic drivers such as rising inflation, and conflicting opinions in the media. While it may not feel like it in the moment, bear markets are a normal part of the long-term investment cycle.
During these times, making dramatic changes to your investment portfolio is a common reaction. However, doing so can have a serious impact on your ability to reach your long-term goals.
Keep calm and carry on
“Social media and instant information have changed the dynamics of economics and politics," says Juan Aronna, head of investment solutions and products at RBC Wealth Management in Asia.
He cautions against making decisions based on such information, which may result in following market swings and buying high and selling low.
Aronna adds that retaining a macro picture based on fundamentals and long-term asset allocation, combined with making tactical calls according to market cycles, may be the better way to invest – especially if information overload tends to cloud your judgment.
Gautam Chadda, who is head of Portfolio Specialists at RBC Wealth Management in Asia and based in Singapore, acknowledges that while it can be emotionally difficult to remain calm and think clearly when a market downturn erodes the value of your portfolio, seeking out an advisor who can help guide you through the tough days and also operate as a fiduciary on your behalf may be an effective way to navigate such times.
“One key way we can help to educate investors is by explaining the difference between conducting investment management activity and executing portfolio trades," Chadda says.
He explains that the former involves analyzing economics, financial markets and portfolio positioning, then optimizing a portfolio based on the expectation of the investment landscape ahead; whereas the latter involves actually making wholesale portfolio changes. He adds that the real work is in the analysis and decision-making, and it may not automatically lead to changing the portfolio.
“The real risk is confusing the exercise of investment management with portfolio trading activity, which can be a case of doing something for the sake of doing something and may ultimately limit portfolio benefit over the long-term."
Chadda points out that this can be an important concept to grasp and implement – especially during times of market anxiety.
Time in the market, not timing the market
Attempting to time the market may be a precarious practice, as market rallies do not announce themselves with starting guns.
“Not all investments are equal. Quality companies with a proven financial track record and high ESG (Environmental, Social, and Governance) scores may protect a portfolio," Aronna says. However, growth stocks and unicorn companies are not part of this approach.
He adds that the market is cyclical – investors can take more risk in their portfolios during post-recessionary periods.
Chadda says it is incredibly difficult for investors to know when the best 10, 20 or 30 days in the market will be over a 20-year period.
Missing the best days in the market can have detrimental portfolio implications
Dollar value of $10,000 invested in the S&P 500 from January 2003 through December 2022 (including dividends)
Source - RBC Wealth Management
“Staying invested or spending 'time in the market' is a key component of long-term investing," he adds.
“The discipline comes with remaining invested, staying diversified, reducing leverage and keeping portfolios relevant to the market environments expected to unfold over the coming months [and] years."
Diversification as a strategy for managing portfolio risk is important, and understanding the principle of diversification will help you to stay invested in difficult markets.
Spreading your money across a range of asset classes – including equities, bonds, alternatives and cash – may help to limit losses in your portfolio. This is because each asset class may perform differently in a range of market conditions; some will lose value, while others will make gains, and this helps to smooth returns over time.
“Buying 30 stocks in the U.S. tech sector is not diversification. Instead, asset allocation involves investing in countries, sectors and currencies," Aronna explains. "And it should be done in a way that doesn't tilt the balance of risk vs. reward."
He suggests using a "core–satellite" approach, which allows investors to keep a stronghold in conservative assets while taking smaller-portion risks in other areas that may be following short-term trends and are more tactical and concentrated.
The importance of a long-term plan
It's not easy to balance what you read in the headlines with your knowledge of long-term return potential.
However, doing so in the context of a carefully considered financial plan greatly improves the odds of investment success; in fact, it may help you view periods of market weakness as an opportunity to buy investments for less.
“Nobody has a crystal ball and nobody is right all the time. Remember what your long-term goals are to avoid FOMO [fear of missing out] and FUD [fear, uncertainty and doubt]," Aronna says.
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