Equity investors need to keep a level head, even amid the unprecedented market volatility, investment experts tell findaWEALTHMANAGER.com.
It used to be said that when America sneezes, global markets catch a cold. The same can clearly now also be said of China – although the events of last week were vastly more than a sniffle, as the Dow Jones took an historic 1,000 point plunge.
Amid global market turmoil, it would be tempting for equity investors to run for cover. Yet there are a number of reasons why investors should “keep calm and carry on”, and maybe even take advantage of the panic, according to investment experts accessible through findaWEALTHMANAGER.com.
According to Chris Justham, a relationship manager at 7IM, the most important thing is not to succumb to swings in the risk-on/risk-off attitude that still runs through the markets, and which can see investors dumping investments that may be perfectly sound in the long term. “The safest place to invest is usually where you have been invested all along,” he said. “During times of panic, selling is indiscriminate. Everything goes, bathwater, baby and bathtub – then bath-times are declared to be too risky to engage in ever again.”
As is often said, investors haven’t made – or lost – anything until a transaction is actually carried out and so they must view volatility, and potential losses, without panicking. To be successful, equity investors need to overcome a number of common psychological biases which can lead to deeply illogical (and unprofitable) behaviours. Buying at the top of the market (because of greed) and selling at the bottom (because of fear) is incredibly common but, of course, no way to make money. “Selling an investment after it has fallen guarantees a loss,” said Justham. “Holding it, and going over your rationale for buying in the first place is a much better use of your time.”
Duncan Carmichael-Jack, partner at Vestra Wealth, also cautions against knee-jerk reactions – particularly in the summer months. “The headlines have been grim and sentiment is poor, but we do not believe that now is the time to be panic selling,” he said. “It is worth bearing in mind that stock market liquidity is extremely low in the summer months and this tends to amplify the move in equities as there are fewer buyers when investors panic sell.”
A dearth of real information
Investors also need to bear in mind that during the summer, company information on trading is much reduced and headlines instead focus on geo-politics, Carmichael-Jack points out. “Sparse data can create false signals and there is limited new fundamental information to merit any change in strategy,” he continued. “As a result, we believe it is best not to react to headlines when genuine news is so thin. Buying now may feel like catching a falling knife, but equally we do not feel it is right to sell at these levels.”
One of the most famous pieces of advice from Warren Buffet, the world’s most successful investor, is “Be fearful when others are greedy and greedy when others are fearful”. So, with fear in full flow, should investors be looking to pile into equities?
Taking advantage of market turmoil is, again, a matter of discipline, the professionals said. Just as equity investors should hold investments where the original rationale for buying them remains valid, they should only consider (sensibly) increasing their exposures where attractive valuations bolster an already strong investment case. “If you are able to remain calm, and stick to your investment theory, you should be able to purchase assets for less than you could yesterday,” said Justham.
When trying to uncover value opportunities, the key is to look at the investment fundamentals behind the headlines, it was said. “Although sentiment has turned negative, it is important to remember that the last quarterly earnings season in the US, UK, Europe and Japan saw the majority of companies beat analyst expectations,” said Carmichael-Jack. “If we look at earnings as a percentage of the price on UK equities, then equities look even more attractive.” He also points out that investors need to bear the low-yield environment in mind, since “dividend yields remain much higher than bond yields and cash is yielding next to nothing”.
Taking emotions out of the equation
According to Justham, as long as investors are taking a long-term view then equities are still their best option and – while their nerves may be sorely tested at times – he sees emerging markets as having the most potential within the equities universe. “There is more potential for terrifying days, but also lots of potential for amazing decades,” he said, emphasising that fluctuations – and therefore potential losses – are not uncommon over a shorter time horizon. The key, he says, is putting unhelpful emotions and assumptions to one side.
“If you are superhuman, you might be able to take the emotion out of your decision. However, it is worth realising that most professionals in the finance industry outsource a part of their personal finances, just in order to take some of the inherent stress and unwelcome biases out of their hands,” he said. “If investors choose to make their own investment decisions, not only do they have to verify that the information a decision is being based on is correct and timely, but also be confident that they have critically analysed the situation and are not merely following what may be someone else’s narrow view.”
It is difficult to know which measures the Chinese authorities will take next and what the precise ramifications of those decisions will be. There is every likelihood that interventions could change the investment landscape dramatically and render previous assumptions redundant, however.
Vigilance and avoiding being swept along by market sentiment will be paramount going forward. If you would like a helping hand in keeping a cool head, try our smart online tool to start the process of meeting the right professional adviser that suits your profile and needs.
