With stock markets all over the place in the last few months it’s worth remembering seven simple truths to help you live, and survive, market volatility.
1. Don’t make presumptions
Markets are unpredictable and don’t always react in the way experts predict.
2. Someone is buying
Exiting the equity market when prices are falling is like running away from a sale. While prices have been discounted to reflect higher risk, that’s another way of saying expected returns are higher.
3. Market timing is hard
Recoveries can come just as quickly and just as violently as the prior correction. There are dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.
4. Remember the power of diversification
When equity markets fall, other highly-rated asset classes tend to flourish. This limits the damage to balanced fund investors. So diversification spreads risk and can lessen the bumps in the road.
5. Markets and economies are different things
The world economy is forever changing and new forces are replacing old ones. This applies both between and within economies. For instance, falling oil prices can be bad for the energy sector, but good for consumers.
6. Nothing lasts forever
Just as smart investors temper their enthusiasm in boom times, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes.
7. Discipline is rewarded
Market volatility is worrisome, no doubt. The feelings being generated are completely understandable and familiar to those who have seen this before. But through discipline, diversification and understanding how markets work, the ride can be made bearable.
These seven truths were first outlined in a paper by Dimensional Fund Advisors in 2014, but they remain as relevant today as they did then and nicely sum up how we manage our portfolios at Price Bailey Private Client.
This article is for information purposes only and no action should be taken in reliance on it without advice. Price Bailey Private Client is an appointed representative of PB Financial Planning Ltd which is authorised and regulated by the Financial Conduct Authority.