The markets always recover

Emotions run high during periods of uncertainty, pushing investors to either rush to protect investments and adjust their portfolios, or take advantage of sudden opportunities. While taking advantage of volatility is an important part of investing, and investors generally look to buy low and sell high, this is tough to achieve successfully time after time. Stock markets have already priced in most events including rate hikes, unemployment numbers and management changes, and regardless of market shocks have recovered time and time again.

Looking back, the stock market has not only recovered every time, but in many cases has gone on to new highs after dropping drastically. This has happened after all the big market events, including the Global Financial crisis, the war in Ukraine, and Covid-19. In a capitalist economy, wealth is created by entrepreneurial activity, and that activity is rewarded over time with a return on the capital provided.

Have a plan - and stick to it

Having a plan is key to any investment strategy. To start the plan, you will have to set investment goals. Setting investment goals will determine how much risk you are willing and able to take and inform your decisions in building a portfolio.

Understanding your investment style and the sorts of outcomes it can entail will help you to feel more confident when things don’t go your way. The S&P 500 Index fell this week? Not too much of a problem – you’re planning to hold it for another thirty years. An exciting startup crashed and burned? Par for the course – you’re well-diversified, and already researching a fresh batch of up-and-comers.

Before making any investment, be sure to decide how much risk you’re comfortable taking on. Being prepared helps beat investment stress. When you have a solid plan to follow, a setback is less likely to cause panic. But in order for the plan to work, you have to have discipline.

Discipline takes the sting out of short-term shocks in two ways. Firstly, it stops you from selling assets at a loss because you have the freedom to wait for the downturn to right itself. And secondly, it stops you from taking on more risk than you are comfortable with in order to make up for any losses you incur through panic selling. If you stick to your investment goals, then it makes riding out short-term volatility easy. You do this by not exposing yourself to details that might make you change your mind. If you’re diversified, you’ll have that peace of mind.

Diversify for peace of mind

Diversification is one of the most important tools available to any investor. Using diversification as an investment approach can also help you avoid getting emotional about your investments because a portfolio that is well balanced and diverse is less affected by swings in the market. You can diversify within asset classes; across asset classes, and across geographies, investing in opportunities in both developed and emerging markets. 

If you’re investing in equities and focus entirely on the healthcare sector, you’ll be left in a tough position if the sector as a whole takes a beating. But if you’ve invested across the equity universe – choosing from a range of sectors – a tough month for a particular industry or company won’t mean too much. A diversified portfolio will help you avoid snap judgements and hasty decisions. If you ensure that your portfolio is always well-balanced, you won’t need to worry as much about market swings, helping you invest with calmness and objectivity and avoid making decisons as a result of loss aversion.

Avoid loss aversion

Loss aversion is the phenomenon by which people experience feelings of loss, failure or defeat more acutely than feelings of gain or success. Fear of loss affects investors in different ways. It can manifest in risky behaviour – like rushing to choose a new investment without proper consideration – or denial, where a poor investment might be held for too long because the investor doesn’t want to feel like they’ve made a mistake. As elsewhere, careful research and a solid understanding of your investment objectives should guide you here.

To avoid acting on impulse and keep your feelings in check, a good investor needs to have the ability to cut the losses and extend the profits. This comes back to discipline, having a plan and seeing it through. Investing isn’t always about jumping on an opportunity, buying low and selling high or timing the markets. It should be about your own personal goals and timeline and having the tenacity to stick to your plan even when the going gets tough.