Falling investment markets

Markets have fallen recently with concerns over rising inflation and interest rates and the war in Ukraine. In this uncertain environment, clients are asking me: “should I sell?”, and those with cash to invest are uncertain if now is the right time to commit to investing.

Why do falling investment markets cause concern?
Rather than seeing movements in markets as being completely normal and part of the regular cycle in markets, I believe the media instills fear among investors. I follow the financial news every day and read headlines dominated by talk of slumps, crashes, stagnations, recessions etc. but rarely see positive news stories about investments and markets such as how many global stock markets reached all-time highs in 2021.

This is getting worse with internet-based news as “click bait” headlines are used to prompt us to click through to read these apparently disturbing events.

Humans are bad investors
Our brains are not designed to make sound investment decisions as we are subject to biases and cognitive distortions and our emotions, rather than fact and logic, overly influence our decisions. One of our biggest weaknesses is our loss aversion which can lead to not taking advantage of investing at low prices during market falls.

Professionals versus amateurs
We often see professional investors reacting in an opposite manner to the general public/retail investors. Many retail investors will sell and are fearful when markets fall but professionals will be taking advantage of lower prices and be purchasing investments.

Context for investing
It is important to reassess exactly why you should invest. Most people do so to protect their lifestyle as they want to ensure their investment and pensions maintain their real value after inflation over time – this isn’t possible in cash.

If you are investing for the long term, then you increase your chances of generating longer term growth and we know that, even though markets may go lower in the short term, over the longer term you are “stacking the odds” in your favour.

Time is on your side with investing
Data shows that the risk of stock market investment reduces with the time you spend in the market as you have the ability to weather the short term ‘blips’ in market. For this reason there is a popular stock market adage that time in the market is more important than timing the market.

Holding through downturn
The benefits of holding though short-term falls in the market were highlighted to me recently by Terry Smith, manager of the Fundsmith fund. He gave an example of a share he purchased at the end of 2007 for $7.07 and by 26th February 2008 it had lost almost 40% of its value at $4.28 – this promoted a lot of investor anger at his decision. However, this short term blip is dwarfed by the enormous increase the share price subsequently enjoyed, increasing in value to $172.39 by 4th February 2022. The company was Apple, until just last week the most valuable company in the world.

Tips for investors in this climate

• Invest as early as possible and remain invested – act against ‘herd’ instinct
• Remove the psychology from investment – draw up an investment plan and stick with it
• Minimise tax – one of the biggest eroders of investment returns
• Minimize fees on your investments and pensions – another big eroder of returns
• Asset allocation – predicting which parts of the market will weather the storm better is difficult, so ensure you have a correctly constructed portfolio which is widely diversified and importantly, has corelation benefits