Recently, whilst explaining something to a friend, I remarked that markets are simply what they are! I was referring to the fact that no matter how sophisticated and institutionalized financial markets are, they are, at the very core, a place of exchange; and that for markets to thrive as they do, there must always be the basic elements of varied human expectations and behaviours. Furthermore, at every point of trade and exchange, someone believes differently about the product they are buying or selling and when markets swing as they often do, it is on the premise of human overreactions in either direction.
I went on to state that what intrigues me about this human behaviour conundrum is that year in, year out, through observing several economic seasons and market cycles, most investors tend to have the same reactions and act in the same direction to the same set of economic variables – rushing out when everyone is rushing out and rushing in when everyone is rushing in.
The age-long advice corroborated by several seasoned investors that one should never panic when the market does seems to get lost on most of us and the usual herd mentality from the fear of losing more portfolio value (from a crash) or missing out (from a rebound) continues to take precedence.
All these discussions with my friend emanated from our contemplations about expectations for global markets in the coming quarters. Currently, the agitations from geopolitical tensions, Russian/Ukraine war and their passthrough to commodities prices in many jurisdictions have created quite the dilemma for monetary authorities as to how best to deal with the trending inflationary pressures and its potential disruptions.
As we prepare for what could be light or major corrections across global markets, investors must look critically and less sentimentally in their considerations in order to take the best advantage of the trends, especially where more patient, long-term capital is accessible and to consider their investing criteria in a potential downturn as they do when the economy is growing.
A few things to keep in mind
Keep a long term view: It is important to not discard your strategy when market seasons change and not to be overly worried about short term market values and changes.
Remain mindful of your risk tolerance and profile as a whole: Investors must try to stay focused on what risk they can afford to and need to take and not vacillate too aggressively when changes occur without proper analysis.
Cost averaging: Buying higher or lower to even out cost of existing investments. As you buy lower, you are, in effect, driving the average price you pay lower, which in turn boosts your returns in the long run
Rebalancing your portfolio: You can rebalance your portfolio weighting across assets when prices are falling in one asset class to a more market favourable asset class
Study the markets: Investors must equip themselves with information and understanding about how certain assets behave during a downturn as well as how and when they rebound. Stocks, for example, behave differently to bonds and usually have an inverse relationship. Gold, as another example, often rises as markets plunge and vice versa.
Having said all this, markets can sometimes be unpredictable and while it remains important to carefully assess the gains and risks of various investment options in mercurial economic times, it is wise to stick to an investment strategy that is well informed and takes into consideration your risk profile and investment objective.
