Yes, markets are shaky right now but don’t panic!
Written by Lynda Calver on February 01, 2019.
Volatility appears to be the watchword for the markets in 2019 – at least for the foreseeable future. 2018 was not a great year for stocks. Many global markets ended the year in bear markets, characterised by a decline of 20% or more from their peaks. So what will 2019 bring?
If you Google ‘stock market predictions for 2019’ you will find wildly differing views on how the year is going to pan out for the world of finance. These range from the highly optimistic - such as a 15% gain for the S&P 500 in 2019 - to the doom-mongers warning of recession.
While the more pessimistic analyses can cause a tremendous amount of worry for investors, I’d urge you to resist the temptation to panic sell your shares and stash the proceeds somewhere deemed ‘safer’, bearing in mind that there is risk of one kind or another whether you invest in shares, stick it in the bank or hide it under your mattress. Don’t forget that if the rate of inflation is lower than the interest you are earning on your savings, they are falling in value.
Remember too that history tells us that stock markets are cyclical and that what goes down, generally comes back up. Check out this rather wonderful historical chart which shows the ups and downs of the Dow Jones over 120 years. Of course there are some tremendous peaks and troughs but when you consider longer time horizons the general direction is up. As long as you keep your money invested for a reasonable amount of time, the short term volatility becomes irrelevant. You simply don’t need to worry about it if you stay invested. Conversely, trying to time the markets amounts to taking a huge gamble that is unlikely to pay off and here’s why.
So, the markets take a dramatic downturn, you panic and sell all your shares with the intention of reinvesting once the market has bottomed out. But how do you know when the bottom has been reached? And when do you decide is the optimal point to re-enter the market? You just cannot predict either of these events with any accuracy.
Much more predictable is the likelihood that your timing will be off and you will be un-invested when the powerful rally that often follows a bear market occurs – a disaster for your now diminished savings.
If you don’t believe me, take a look at this graph which shows just how damaging it can be if you try and fail to time the markets and miss out on the peaks that follow the troughs.
The moral of the story is that buy and hold works for the majority of people. Regular, consistent savings invested over a mid to long term time frame is the most effective strategy to build your wealth. There are a few rules to follow, like ensuring that you have a diversified portfolio and that you regularly review how your investments are doing so that you can occasionally rebalance the portfolio when necessary, especially after major life events like births, marriages and deaths.
If your timeframe is shorter, you may need a different approach. Once retirement is imminent (within a decade or so), I would recommend reducing your level of investment risk to protect your assets because there is less time for them to bounce back from any major market falls. This highlights the importance of taking all relevant factors into consideration when investing and is one reason why it’s a good idea to take advice from a professional financial adviser rather than going it alone and taking unnecessary risks because you are unaware of them.
If you’re an expat living in Asia and you’re feeling anxious about how prepared you are for retirement or you are seeking some reassurance regarding how your investments are performing, I’m all ears. I would be delighted to discuss your situation with you and work out the best way forward to secure your financial future. Do feel free to get in touch with me at firstname.lastname@example.org.