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The mind of a seasoned investor in face of tumultuous financial markets

How to cushion your investment and amplify investment growth when faced with a market downturn.

Markets are fundamentally driven by material news which can either move the market up, down or trade sideways. Natural occurrences also play a pivotal role in pushing this outcome. Regardless of the outcome, the mind-boggling question one would ask is, how to tactfully approach each end result from an investor’s perspective. This article will unpack some of the investment strategies a seasoned investor can employ in their portfolio(s) with the aim of cushioning the investment and amplify investment growth when faced with a market downturn.

The financial gains of 2019 and momentous cheers of the new year were all dramatically decimated by the unprecedented lethal veld-fire-like spread of the coronavirus across the globe. This natural occurrence caused massive panic among governments, investors, markets, households, faith-based communities, industry and commerce, as all grapple collectively to combat the rippling effects of this pandemic. As a result of this, the first quarter of 2020 saw financial markets shrink the fastest in modern history and several governments in the free world triggered hard and soft lockdown regulations to flatten the trajectory of this deadly virus.

All this, from any participant’s view, looks dark and gloomy, right!!! Yes, we feel the same too, as we are all bound by the risk-averse principle. However, this uncommon natural occurrence does characterise the mettle of an investor in terms of one’s state of preparedness and also exclusively distinguishing one’s tactfulness and skill in reshaping or rebalancing the investment to maintain positivity.

In chaotic markets movement like the ones we witnessed a few weeks back, most investors respond quite differently, with some investment decisions resulting in profound regret and disastrous ending. Below are a handful of basic investment strategies one can deploy in bearish times:

Investment rebalancing

Full withdrawal of an investment and placing the proceeds into a bank account when encountered with a bearish cycle is not a wise move for the following reasons:

  • One can miss out on the upswing that ensues after the meltdown.
  • Depending on the investment type one can be slapped with a huge tax liability in the form of capital gains tax.
  • One can incur fees emanating from the capital movement.
  • Unjust exchange rate movements.

However, investment rebalancing is much more sustainable in the short to medium term. This entails reducing exposure in stocks, funds or asset classes that have the force of rapidly eroding investment value and increase allocations in cash, defensive stocks such as utilities, consumer staples etc that protect and enhance investment growth. 

Diversify the investment into several asset classes

This is the buzz strategy every investor talks about. But in general, what is diversification? There is a common phrase that one cannot put all eggs in one basket. If one takes the risk by amassing all eggs in one basket regardless of the size of it, there is a probable possibility that the basket might break thereby breaking all the eggs in the aftermath. Therefore, if one invests in the same asset classes with similar positive correlations, there is a near risk of losing out the whole investment when that set of asset class underperforms. Therefore, the need to diversify the investment. The primary goal of diversification is to spread risk across several asset classes so as to deter capital losses.

Depending on one’s investment composition, constraints, liquidity needs, objectives and time horizon, your financial advisor can discuss with you how to reduce the risk concentration of your investment.

Invest for the long term

Investing with a long-term view is always encouraged in periods of markets disorderly or market upswings. However, this depends on one’s liquidity needs and tax considerations. The most notable advantage in having a long-term view in market downturns is the ability for the investment to unsmooth the losses incurred during the rough patch. Whereas in upward spiral markets, the advantage for a long-term strategy is to continuously enjoy capital gains whilst timing your exit from the investment.

Do not panic

Whilst it is common among humans to panic in the face of adversity, however, panic in most cases cascades into impulsive and irrational investment decisions. Instead of panic selling or buying, an astute investor would holistically assess the fundamentals of his/her investment’s risk-return objectives without haste and evaluate the near dangers. Once this step is critically analysed, one is able to make a well-managed and informed decision of what course of action to take.

Food for thought note

Sir Isaac Newton, who undoubtedly is the most influential scientist of all time, in his law of gravity once said, “What goes up, must come down.” Well, in financial terms we invert this quote and say, “What goes down must come up”. What this means, in summary, is, if financial markets take a knock due to natural occurrences or adverse macro-economic factors, markets will seek redressal when all the “noise” has been fully digested by market markers.

Therefore, keep your hope strong, never stop hoping in the face of disorderly market movements and in that hope, you will find the lasting solace.

ADVISOR PROFILE

Mauro Forlin

Global & Local Asset Management

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