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The latest Investment Matters articles are listed below.
How do I avoid the market’s wall of worry?
Current market volatility is causing headline news to scream panic! From the recent sell-off in technology (FANG) stocks to the uncertainty related to the pace of US Fed interest rate tightening, the trade war with China and how Brexit will actually land, there appears to be cause for worry everywhere. But investors should consider the current period of volatility with clarity – the market is always climbing a wall of worry. Consider the S&P500 index, which since 1980 had positive annual returns in 29 out of 38 years. But in 11 of those years, the peak-to-trough move during the year has been in excess of 10%.
Over the long term, the stock market historically reflects the objective performance of the macro-economy and the individual companies within that economy. Over the short term, however, the stock market often reflects human emotion, perceptions and misperceptions. It appears that managing market risk is much more about staying invested rather than trying to time the market. The bottom line is that market corrections do not equal a financial loss – unless you sell.
There is no consensus definition of investment risk: permanent loss of capital, drawdown, volatility, tail risk or “black swan” events, overpaying for assets, not beating inflation by some margin and the list goes on. For equities, there is also market risk and company risk (which can be reduced through diversification). For bonds, there is credit risk, duration risk and interest rate risk. From a macro perspective, there is recession and geopolitical risk. But probably the most relevant risk for individual investors is the risk of not achieving their investment goals.
Not all risks can, or should, be avoided. Without additional risk, equities would not earn investors a premium over cash. Rather, we should consider acceptable risks versus unacceptable risks.
Unacceptable risks must be avoided. Piling all your cash into the next hot stock or investment scheme is an unacceptable risk. Once an acceptable level of risk has been decided upon, it is more useful for investors to focus on managing those risks that they can control rather than the ones they cannot. Here are some useful rules:
• Be clear and realistic about your investment goal and time horizon.
• Assess whether the risk associated with achieving the goal is acceptable to you or not and make adjustments if needed.
• Create an investment strategy to achieve the goal (with the accepted level of risk) and adopt a decision-making framework for maintaining the strategy and dealing with challenges to the strategy.
• Diversify your investment holdings appropriately. This is the only “free lunch” in investing.
• Don’t pay for paying too much attention. The media thrives on bad news and hype – fear and greed sells. Market “insiders” have their own agenda.
• Keep your emotions out of it – doing nothing is often the hardest. This is not easy on your own and probably one of the most important reasons to appoint a professional adviser and/or portfolio manager to help you navigate through times of turmoil.