Your portfolio is down – What now?
Key Takeaways:
- Slow down and don’t make rushed decisions.
- Remind yourself of the time horizon that is important to you.
- Have you got a solid plan in place to start with. Revisit it.
- Don’t check your portfolio daily of you can help it.
- Talk to someone you trust about your concerns.
| There is no hiding from it, the current news flow is alarming. It amplifies uncertainty which investors dislike and thus leads to market weakness as participants react and re-position. In truth there has never been a period in history where you could not identify a risk which has the potential to cause a sudden sharp market sell-off. Uncertainty about the future always exists. It is just that we perceive it to be higher when it is flashed across our screens constantly or surprises us. By definition events which upset markets must be a surprise otherwise they are already priced in. The Iran attack (or its extent) was a surprise and what we are seeing is concerning at various levels. It is impossible to know what the potential downside is with any certainty. Too much depends on the outcomes and how long it will take to end. Energy prices are a very big determinant of economic well-being for governments, businesses and us as individuals. It is clear higher energy prices will already have a negative impact. Too much here is not knowable. |
Checking your portfolio? |
| If you do happen to check your portfolio you will no doubt see it is off its recent highs. Even with a well-diversified portfolio you may be back to where you were in December of last year. I would encourage you not to be alarmed. Which I admit is about as useful as telling someone to calm down in the middle of a heated argument. There is a strong argument to be made for not checking your investments regularly, especially at times of heightened uncertainty. We all suffer from loss aversion and have a deep desire to act to avoid further losses. The urge is powerful and emotions can often trump logic. But a market downturn is not the right time to be reassessing your tolerance for risk. You will have less appetite for risk when markets are down 20% in real time, relative to how you felt considering the potential for a 20% paper-loss when markets were looking solid. You are human. |
Here is a little experiment |
Which one of the following investments would you pick? |
 |
| You probably chose C right. I know I did. Because all three assets finished at the same value, but C did not experience any downside. It’s what we all want – All of the upside and none of the downside right. But it is a trick-question. All three assets are in fact the same Global Stock Index during the calendar year 2020. The good old pandemic year. The difference? A = checking your portfolio daily. B = checking your portfolio monthly. C = checking your portfolio once a year. |
Good message but too neat? |
| I think it is a great message – worrying about short-term performance is likely to encourage bad behaviour. But I also think it is unrealistic a lot of the time. The 2020 market sell-off and then recovery was one of the fastest in history. So much so that it quite literally felt like it never happened. A few trillion dollars turns out to be an effective band-aid for a global shutdown. At least for asset prices. The Global Financial crisis of 2007/2008 was very different. It took over two 2 years for the recovery to happen. That is a long time spent watching things deteriorate, even if you only look at your portfolio once a year. If you were close to retirement, or indeed already retired in 2007, seeing markets almost halve would have been traumatic. Approaching an end goal requires more hands-on management leading up to the actual event – Simply not looking at your portfolio is unlikely to be very helpful. |
There is risk in selling too |
| A truth you learn through experience is that selling out of risk assets is often the easy part. After a period of strong market performance most people are enjoying great gains. Locking in some of that feels good. And it could be sensible in so far as it fits with your strategy. In other words some kind of portfolio rebalancing. But to sell risk assets (below your strategic allocation) to protect yourself from further downside near term, means you must decide when to buy back into markets too. And this is far trickier than you may think. When the market bottoms, no one waves a flag to give you the all clear signal. Putting money back to work in a down market feels like you are exposing your portfolio to even more losses. So many people wait. The market bounces back by 10%. They agree that on the next pull-back they will buy. The market never has that pull back and the investor remains out the market and does not enjoy the returns that follow. |
Focus on the goal |
| If you are a client and are receiving this then you have a solid, well considered plan. That plan will have incorporated your goals, which means we know your time horizon, your required returns and any cashflows into or out of your investment portfolios. Your asset allocation will have already considered the potential for a sell-off, as these things happen to some extent more or less each year. And about every five years markets can experience what feels like catastrophic losses. What you are currently invested in will have considered your goals ability to withstand such scenarios. If you have big cashflows INTO your portfolio we will have considered this too. Inflows we can largely ignore into weakness because buying into a weaker market is beneficial to you. It is the cash OUTFLOWS which are more of a concern because if you have not made provision for them in your plan then you risk needing to sell assets which have fallen in value to meet these cashflows. If you and I are investing together I will have factored these cashflows into your plan for you. You will not be in a position where you are forced to sell assets and lock in losses. |
Talk it over |
| Headlines and market commentators will frequently use fear as a marketing tactic at times like this. They intend to cause you doubt and possibly even scare you into action. Do not be hasty. You would do well to take some time to seriously consider any potential action. If you are not sleeping well at night, then you may want to revisit the goals you have set and the investment strategy you have in place. If all is in order, I hope that will help put things into perspective and provide some peace of mind. I am here if you would like to discuss anything about your plan or portfolio that we have worked together on. If we have not worked together as yet and you are feeling a little anxious, lets have a conversation and see where you are at if you like? |
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