Do you feel like covering away whenever a financial crisis hits? Fret not, because you are not alone! Read on to find some tips on how to navigate through any financial crisis.
Markets are cyclical. Booms will be followed by busts; and busts will be followed by booms. Recognising that markets are cyclical puts into context what you should do when markets are volatile.
Market swings can be unnerving, but they should not distract you from staying focused on your financial goals, your investment principles or the long-term mega themes.
It is hard not to panic whenever the stock market takes a nosedive. In fact, at times of extreme volatility, many investors overreact and bailout of the market altogether. We have studied this behavior and published on the overreaction effect.
On the other hand, some investors do not overreact but instead underreact – they cling on to their investments longer than they should; and some engage in what is called the “ostrich effect” and essentially do nothing.
While both reactions are understandable and can be explained by behavioural finance, neither one is going to help you make progress toward your long-term goals or to beat the market.
The Chinese equivalent of crisis, “wei ji”, encapsulates what crisis entails. “危 – Wei” represents “danger” whilst “机 – ji” means “opportunity”.
It is worth keeping in mind that volatility can open up new growth opportunities as some investments become more reasonably priced.
Have a well-defined vision of your goals and reasons you bought into the investments laid down on paper. If you have not written them down, now is a great time to do it. It is a document you can bring to your family, friends, or Crea8 to get their point of view. Talking it over with others can help you get to a calmer, more thoughtful mindset the next time you are confronting turbulent markets. And it will help you avoid making decisions out of fear.
It is important to realise that the media is not providing investment advice. It is not accountable for your progress toward your goals. It is also overwhelmingly general and not specific to your personal circumstances. Hence, read with care.
Investing should be based on information. So, separate the hype and the noise you might hear in the news from the reality of what is happening in the markets. Do not overindulge in the news.
The common analytics used to understand market volatility are here.
Opportunities come and go. Market downturns — while challenging when they are happening — almost always open up new opportunities. These could be in areas of the market that were perhaps overlooked or overvalued before the downturn began.
Look for those opportunities. Take market downturns as opportunities to reassess your investment strategy and make any changes or course corrections that might be needed.
Make sure that your portfolio is sufficiently diversified. A broad mix of investments, spread between passive vs. active investing, and across different themes, countries and industries can help you cope with volatility.
Volatility tends to make investors feel uncertain and fearful about what could happen next, and that often prompts them to make rash decisions that are not ultimately in their best interests.
Crea8 has online tools that can help you analyse your risk profile. The best thing to do when the markets get turbulent is to take a step back and ask yourself what your purpose for investing was in the first place. How can you thoughtfully adjust your investment strategy to stay on track toward achieving your goals?
While markets are known for their unpredictability over short periods of time, if you look back over the longer term, the trend for the equity market is unquestionably up.
In fact, if you had stayed invested in stocks back in the 2008 Global Financial Crisis— when the Dow Jones Industrial Index hit a low of 6,470 in March 2009 in the wake of the financial crisis — your investments could potentially have increased many fold since then.
That is all the more reason to take a measured response to volatility and think through any steps before you take them.
Risk management is key to weathering market volatility. Crea8 adopts a comprehensive approach to risk management that intends to allocate risks prudently. Risks are managed in the overall allocation, position sizing, exposure to different industries and countries, our ability to automatically monitor your portfolio and more. Our comprehensive guide to how we manage risks is here.
The cyclicality of markets will never end. As such, you need to be able to understand this and take mitigating actions in order to be a successful long term investor.
Following our 8 tips can most definitely help you navigate through financial crises.