The following headline on news.com.au caught my eye last week:
‘The ASX has gone into freefall following Wall Street’s historic bloodbath, with experts warning of more pain to come.’
It seemed to cause a bit of a stir amongst my friends and family and I received text messages, phone calls and emails that I am sure many financial planners would be able to relate to, including:
“Everyone here is talking about the global economy crashing”, or “I’m feeling sick about where the market is headed”, and “What if there is another financial crisis? I will lose everything”.
The advisers I’ve spoken to tell me that this is a pretty common conversation with clients. And, to be honest, when you read headlines like that you can understand why.
I have heard about discussions about global markets crashing and hearing that US equities have been ‘crazy’ expensive over the last three years. But I think it’s important to look at things objectively and try not to categorise. For example, the US market (and some other markets around the world) may be expensive as a whole, but that does not mean that there is no value to be found.
We need to keep things in perspective and revisit why we invested in the first place. By doing this these headlines don’t bother me too much, in fact, I think this kind of emotional reaction is pretty normal. But I always try and take a step back and ask myself these three questions:
- Can I time the market?
This isn’t a question about whether or not it is possible to time the market, ie buy when prices are low and sell when they are high, it is a question about whether YOU can time the market. The market probably can be timed, if you can interpret the right bottoming and topping signals, but getting this right consistently is exceptionally hard to do, some may argue impossible. Which leaves the question of whether or not you can do it, or at the very least know someone that can. Of course if you could time the market you would have sold all your shares last week before the ‘bloodbath’ began! The old saying that ‘it’s not timing the market but time in the market’ remains true even in tough times. - Have my short- or long-term goals changed?
When we invest we have a goal in mind – saving for retirement, a house or a car for example. If the markets fall, do our goals change? A material drop in the market can result in a change in goals and objectives as it resets the expected capital, but on average it should not. We can use this as a time to reassess our exposure and consider whether it is still appropriate for our needs.
It’s all about perspective. I try to be proactive and not to react to headlines, or ‘noise’. This is a big emotional test of risk tolerance. It is normal as humans to respond emotionally to market movements, but it is important to go back to basics and remember your goals. Make investment decisions based on your risk tolerance, timeframes, goals and your exposure, not headlines. - Do I know why I have chosen the particular fund manager or financial planner?
If you have chosen a fund manager, or have sought financial advice, then revisit why you made those decisions initially. Hopefully you would have worked out what was the best exposure for you and your risk tolerance. That way, you made investment decisions when environments were stable, instead of making decisions when times are greatly uncertain. When you chose a financial planner or a fund manager then presumably you did it because you trust them. The question is, do you still trust them? If so, then not much should have changed.
The market is uncertain, but commitment to a strategy is vital, whether that is your strategy, your fund manager’s strategy or your adviser’s strategy. Conviction should be strong and beliefs should not change.
Finally, someone once told me that it is important to compare what your belief is with what is real or possible. That is what will help you make better decisions and hopefully be a tool for you to cut out the noise when you need to do it the most. Next time you read about the ‘bloodbath’ in markets (and there will definitely be a next time), step back and ask yourself those three questions.
Joy Yacoub holds a Bachelor of Economics and a Bachelor of Commerce (UNSW), specialising in Economics, Finance and Business law.
