Stock market volatility? Keep calm and invest on
The stock market is heading into the statistically worst months of the year, September and October, with a Fed hike looking increasingly likely, and possible signs that global easy monetary policy might be entering the final stages.
These factors alone suggest that tin hats may be in order. At the moment, volatility is still at exceptionally low levels, but this could well be set to change.
If you are the sort of person who tends to get very nervous but bails too late just as markets are about to bottom, you should definitely read on! And in case you were wondering, actually, most of us are in this camp.
1. Equity investment is for the long term
These days, instant gratification is pervasive. Although everyone is aware that typical fast food offerings are not healthy, far too many people eat them. Investment is the same.
It is not a secret that the single most active group of participants in equity markets globally are high frequency traders. They trade in nanoseconds.
And yet every respected professional fund manager will tell investors that equity investment is for the long term. Furthermore, the only verified track record of outstanding equity performance is to be found from exemplary long term investors such as Warren Buffett.
So it is key with equity investment to accept that there will always be ups and downs in the short term, but that the long term performance is what matters.
2. Make adjustments rather than massive changes
When markets enter a period of severe turbulence, and you are concerned about your portfolio, rather than doing anything drastic, try making just a couple of changes.
This might involve raising a bit of cash. You can sell one or two positions that are causing particular angst. Alternatively, you might consider switching one or two positions into more defensive areas of the market such as foods and pharmaceuticals.
The Great Financial Crisis of 2008 was a once every 60 years’ event, and is unlikely to be experienced again for a good few decades at least. While the next market consolidation may involve some big falls, chances are that the bounce-back will come much sooner than expected, and you do not want to be out of the market at precisely the wrong time.
3. Dollar-cost-averaging can save a lot of heartache
If you are still struggling mentally with long term investment, and making minor adjustments to the portfolio is not working for you when share prices are falling rapidly, holding a market index Exchange Tradeable Fund (ETF) might be a good option.
You can then buy the ETF regularly using the dollar cost averaging method. Although an ETF will expose you to a falling market, dollar cost averaging will ensure that you buy more when markets are weak, and less when they are expensive.
If you automate this process, the element of panic will be excluded completely.
4. Keep cash to hand for those times when shares become excessively cheap
Market crashes are the best time to buy shares at exceptionally cheap prices. Rather than be fully invested at all times, why not keep a cash pile to hand so that when share prices are at rock bottom, you can buy a few of your favourite names at bargain basement prices.
Individual investors are in the fortunate position of being able to determine how much share exposure they want, unlike fund managers who usually have a mandate to be invested at all times. Take advantage of this.
And last of all, remember that if you are going to panic about the equity market, make sure you panic early!