These unpredictable times can bring a large variance in investing behavior. Many who weren’t considering entering the market are now considering it with the price seeming right, while others are looking to sell to put stable cash back into their pockets. No matter whether you’re a seasoned investor or thinking of dipping your toe into the market for the first time, the main question on every investor’s mind is, “Should I be changing my strategy to invest?”
It’s easy to react to headlines and panic when exceptional events like this pandemic occur, however, a measured and considered approach to your investment strategy is likely to be more rewarding.
Are you trying to catch a falling knife?
If your strategy is to invest now when you may not have considered it before, you’re likely trying to time the market and pick the bottom. Although we’ve seen dramatic drops, it is likely the selling isn’t over. Experts refer to this type of investment behaviour as “catching a falling knife”.
Buying into a market with a rapid drop can be dangerous, just like catching an actual falling knife – it’s risky and you’re better off waiting until you know it has fully dropped onto the floor. If timed correctly and an investor buys at the bottom of the market, a significant profit can be made as the price recovers. The real risk is if the timing isn’t right and you end up with many more considerable losses before any gains.
The unpredictability of the virus means that it’s hard to analyse trends and predict the bottom without technical indicators and chart patterns to support the momentum of the market. Announcements from central banks or government authorities taking measures to control the virus aren’t the saving attributes the market needs. It is likely we won’t see significant changes until health authorities announce the outbreak has peaked or a cure has been found which could be for several weeks or months until business returns to usual.
CEO of BetaShares, Alex Vynokur explains:
“Your investment horizon, tolerance for risk and overall investment goals are important considerations when deciding whether the time is right to buy into or sell out of an investment. In a volatile market environment, investors are particularly at risk of allowing their emotions to get in the way of sound judgment. My broad advice is not to lose sight of your goals.”
“Specifically, I would encourage investors to ignore the short term volatility and play the long game. No-one knows what will happen in the short term – but if you have your asset allocation right, and hold quality investments, you are likely to be well-placed over the longer term.”
Are you considering selling at the bottom of the market?
With much uncertainty around the Coronavirus pandemic, some investors feel safer on more stable ground, ‘cashing out’ to avoid any further losses. If your portfolio is bleeding red, taking your money out limits any future growth providing a long term losing strategy.
Research indicates that investors who sell out at the bottom of the market and buy back in when the price begins to recover when they feel more comfortable (for example, in a year when the pandemic has settled), the portfolio performs more poorly than those who stayed invested. It’s incredibly difficult to pick the bottom of the market and when to buy back in, so it is likely you will miss out on a significant part of the rebound.
Selling your losses makes them losses as it doesn’t allow your money to work for you in the long term through the effects of compound interest.
It’s often said that time in the market is more important than the timing of the market, so if you have the discipline and time to let your assets recover, this dip in the market may not affect your overall plan.
In Alex Vynokur’s opinion:
“Most experienced investors take the approach that you should make your investing decisions without regard to what has happened previously – in other words, your decision to buy, hold, or sell should not be affected by the past price movements. While it is natural to be tempted to sell out of investments when the market is under stress, or the share price has fallen, the danger is that you’re selling at a bad time.”
The unprecedented selling that has been seen across the market has been indiscriminate and global, with most sectors losing value despite their underlying investment metrics and previous performance. Investors driven by value will look for areas that will recover to provide a long term return. Be clear on your situation and consider including these general factors into your investment strategy:
- Invest for the long term – Money you have in the market is considered to be money you don’t need right now. Determine your strategy based on the amount of time you can allow for your investments to grow and recover.
- Make contributions gradually – By investing a fixed sum into the market gradually and regularly, you will engage in a dollar-cost averaging strategy. This means buying more units when the cost is low and less when the cost is high.
- Diversify as much as possible – Consider a wide range of investment options to spread the risk across your portfolio.
- Seek good advice – Everyone has a different situation and their investment strategy should be personally suited to their lifestyle and goals. Talk to an advisor before changing your investment strategy.
Alex’s final thoughts:
“I encourage all investors to maintain an element of diversification in their investment portfolios. In other words, don’t have all your eggs in one basket. Incorporate global equities alongside Australian shares, and don’t forget to allocate to fixed income. In fact, there are no excuses today not to be diversified, given that all those asset classes can be accessed easily and cheaply via an ETF.”
“I would also encourage investors to periodically (say, once a year) rebalance their asset class weights back to target. That means selling down exposures that have increased in weight relative to target, and buy those that are underweight. That’s an example of selling that can be beneficial. In this context, whether you are making a loss or a profit should be irrelevant to your decision to buy or sell.”
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Alex Vynokur is CEO of BetaShares, an ETF manager, providing investment solutions that aim to help Australian investors meet their financial objectives. He has a Bachelor of Laws and a Bachelor of Commerce (Finance) from the University of New South Wales and has served as a Principal at Apex Capital Partners since 2005. Follow him on LinkedIn.
Main image source: LinkedIn Sales Navigator on Unsplash
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