Why investors should take a long-term perspective and not panic
On the 24 February the Russian President, Vladimir Putin, ordered a military invasion against Ukraine. A war that many considered unthinkable had begun. Russia’s invasion of Ukraine has sent shockwaves through pretty much every asset class across the globe. But if you are a long-term investor the best course of action for most individual investors is to keep calm and carry on.
Selling into a falling market is the opposite of what successful investors do. Equally important is the fact that no one knows what Russia’s invasion of Ukraine ultimately means for everything from energy prices to monetary policy. And then there’s the case that, historically speaking, stocks tend to recover quickly after being derailed by international turmoil.
It’s only human nature to want to sell your investments in a down market. Why? Most of us are risk-averse and want to avoid losing more of our money. However, when it comes to investing, a logical approach and a long-term mindset are required to outsmart the short-term down markets.
Trying to navigate the ups and downs of market returns, investors seem to naturally want to jump in at the lows and cash out at the highs. But no one can predict when those will occur. It’s common investment knowledge to ‘buy low and sell high’. But if investors decide to panic sell their investments because the market has a bump in the road, they’re essentially following the opposite strategy – ‘buying high and selling low’.
Managing the volatility of our emotions is more important than the volatility of the markets, which we can’t manage. There are a number of time-tested strategies to help investors deal with market volatility. Two of the most prevalent are: invest for the long-term, and maintain realistic performance expectations when it comes to returns.
By coupling these strategies with maintaining proper portfolio diversification and avoiding the pitfalls of market timing, investors have the foundation needed to help manage their overall exposure to market volatility.
Historically, the stock market has been up more than down. Often after a lengthy bull market, some investors may lose sight of the fact that their investments could generate negative returns. In order to keep market volatility in perspective, it’s important to maintain realistic expectations about your investments, especially if returns move closer to their historical average.
It’s important to focus on long-term goals and not become distracted by short-term volatility. While losing money in the financial markets is never easy to accept, remember the old adage: Time is on your side. Typically, the longer an investment portfolio is held, the more likely overall positive results are realised. The lesson here is to prepare for the long haul and try not to overreact to periods of uncertainty.
Focusing on long-term horizons
It’s important not to try and second-guess how the Ukraine-Russia events will impact on markets, or even attempt to make a bet on them. Instead you need patience and to avoid panicking. Focus on your long-term horizons of at least five to ten years – investment periods that have historically fared much better.
When the markets are going down, it’s only natural we are panicked and we fear losing more of our money. We understandably want to take action to protect whatever is left of our investments. Our brains are not wired to accept losses. So, our natural reaction to losses during a market downturn is flight, not fight. Panic selling is driven by fear, market sentiment and short-term noise.
That’s why sensible diversification – owning a mix of assets, including shares, bonds and alternative investments such as property – can help protect investment portfolios over the long term. When one area of a portfolio underperforms, another part should provide important protection.
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INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
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