We are very aware that recent portfolio falls can be difficult to stomach and are unfortunately sometimes viewed through the media prism of mass hysteria. After all we invest in our own portfolios so have experienced the same declines as you do. It is our job in these difficult times to keep a cool head and stick to the plan and we look forward to working with you all in doing so.
We have summarised three mistakes commonly made in market downturns which we believe are important to highlight in the current environment as they are helpful in managing your emotions around stock-market uncertainty. And if you are feeling uncomfortable please do let us know.
1. Failing to Have a Plan
Investing without a plan is an error that invites other errors, such as chasing performance, market-timing, or reacting to market “noise.” Such temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.
Investing can provoke strong emotions. In the face of market turmoil, some investors may find themselves making impulsive decisions or, conversely, becoming paralysed, unable to implement an investment strategy or to rebalance a portfolio as needed. Discipline and perspective can help us remain committed to long-term investment programmes through periods of market uncertainty.
Remain patient and invested in a broad mix of global stocks and high-quality bonds so that you are better positioned to buffer declines in the equity market. Investing across global markets can help protect against domestic shocks. Periodically rebalancing your portfolio can keep your asset allocation in line with your investment goals.
2. Fixating on “losses”
Let’s say you have a plan, and your portfolio is balanced across asset classes and diversified within them, but your portfolio’s value drops significantly in a market swoon. Don’t despair. Stock downturns are normal, and most investors will endure many of them.
Between 1980 and 2019, for example, there were 8 bear markets in stocks (declines of 20% or more, lasting at least 2 months) and 13 corrections (declines of at least 10%).* Unless you sell, the number of shares you own won’t fall during a downturn. In fact, the number will grow if you reinvest your funds’ income and capital gains distributions. If you were invested right in the first place, there’s no need to change tactics.
No one knows what the future holds. But understanding the past can help us avoid impulsive decisions that may cause far more harm than good to a portfolio’s long-term value.
3. Overreacting or missing an opportunity
In times of falling asset prices, some investors overreact by selling riskier assets and moving to government securities or cash equivalents. Or they may embrace the familiar, perhaps moving from international to domestic markets, in a display of “home bias.” But it’s a mistake to sell assets amid market volatility in the belief that you’ll know when to move your money back to those assets. That’s called market-timing, and the evidence shows that the largest market upswings often follow immediately after the downturns. If you are holding cash, you will miss them.
*Source: Vanguard Investment Strategy Group. Data are as of December 31, 2019.
