Don’t Panic! 10 tips for surviving a downturn in the markets.

After a long period of the financial markets being largely ignored by the media, news of their daily fluctuations has been pushed back to the forefront – just as they did in 2008/2009 and the first quarter of 2020.

For investors, the questions that come to mind are:

What are we going to do now?

How concerned should we be about the future?

What is causing all the market fluctuations?

How safe are our investments?

Is there anything that can be done about it?

This is a worrying time for anyone who owns shares. Seeing the balance in one's portfolio go down can be very emotional.

The reason for the increase in volatility is that everything is becoming more expensive and banking regulators like the RBA are using the tools they have at their disposal (like the cash rate) to curb rising inflation.

The increase in inflation is due to a number of factors, including disruptions to global supply chains caused by the pandemic and of course Russia’s invasion of the Ukraine.

The central banks, who last year were downplaying the inflationary shock as temporary, are now expressing concerns that this could become permanent and are taking action to prevent it.

This is happening as the world starts to make a difficult and decades-long transition away from fossil fuels in an effort to control climate change.

The result of these factors is a major change in the stock and bond markets. Bond yields, which just a couple of years ago were negative, are now increasing.

Expect more volatility

What does this mean for your investments?

The danger for individual investors is in trying to time the market, getting out when conditions seem bad and then getting back in when things have calmed down.

The most recent example of the virtue of discipline was in early 2020 when major benchmarks fell sharply by between 30 and 40%.

This downturn in the market is likely to be more severe and longer-lasting than the one we saw two years ago.

Ten points to keep in mind when looking at your investments are:

1. The stock market has generated strong annual returns over the past century and fluctuations are a normal part of the investment cycle.

2. We know the virtue of being patient in difficult times. In periods ranging from the 1987 crash to the US savings and loans crisis of the late ‘80s, to Asia's financial crisis in 1997-1998, those who held tight (or were patient) came out ahead.

3. The markets anticipate future events and price in bad news accordingly.

4. What moves markets is the unexpected. Imagine what would happen to stock markets if Russia and Ukraine came to an agreement to end the conflict.

5. Even when the markets are falling, somebody is buying. By definition, there cannot be more sellers than buyers if trades are happening because this would create a downward spiral. Markets work by bringing in new buyers who absorb some of the stock being sold off by earlier investors.

6. In recent years, income investors have complained about the low yields in bond markets. However, this is no longer the case, as the correction in global bonds has led to higher yields.

7. There are things you can control such as how you allocate your portfolio between stocks, bonds, commodities, property and other assets.

8.  Remember that nothing is permanent, not even good markets or bad ones. The turning point will often come before the economic indicators suggest it.

9. Despite the volatility in the market, companies are still innovating and creating wealth. The energy transition is a prime example of this.

10. Stay committed to your financial plan even when things get tough. A well-constructed financial plan is one that fits you and your risk tolerance, allowing for some flexibility during difficult times.

Enduring a downturn in the market can be difficult, but it is ultimately achievable with a well-thought-out plan, a long-term focus, and an understanding that the market will eventually recover.

If you are looking for some advice or a second-opinion on your investment strategy, give us a call on 02 9002 0570 or email info@imfg.com.au.

Author: Angus Dockrill

Angus is a Director and Wealth Specialist at IMFG. Angus helps people to improve their quality of life and peace of mind by making smarter financial decisions. See his profile here

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