By Keith Brooks
However you choose to view the current economic climate, it’s not pretty, by any measure.
Domestically or internationally times are uncertain and markets are volatile.
Many investors, new or existing, could be forgiven for thinking now is the time for retreat and doing as little as possible.
With energy prices rising at a ridiculous pace and inflation heading in only one direction they may also wonder if this period of instability will ever end.
But, and it’s a calculated but, it is unlikely to last forever. When we begin to see things settling down is of course uncertain, like everything else at the moment, but as we saw with the global financial crisis the economic situation eventually does calm and return to more normal times, albeit it can be difficult for even the most experienced observers to recognise when it begins.
So, where are we?
Well, it’s been the worst start to a year for global stocks in more than half a century.
Further, we see slowing economic growth, supply shortages from China, the prospect of more interest rate rises and yes, that other thing
– a major geopolitical situation continuing in Ukraine. China agitating on the Taiwan border is also unlikely to help matters.
Rising inflation is a consequence of loose monetary policies designed to boost economies after Covid lockdowns, with the supply issues pretty much caused by such lockdowns.
It’s no secret that during these volatile times many investors get spooked and begin to question their long term investment strategies.
Some (often amateur investors) are often tempted to pull out of the market all together and hold cash until they feel it’s safe to re-enter.
We don’t have to look too far back for many examples of this – when markets plummeted following the first Covid lockdown in March 2020, there was understandable anxiety – this undoubtedly led to individual investors making investment decisions that, in hindsight, may have been a mistake.
What is the result of selling at the bottom of the 2020 downturn?
The markets recovered extraordinarily sharply in the following months and proceeded to go on a bull run for around a year. So investors who sold before this period crystallised their losses and missed out on the recovery.
It may well be teaching your granny to suck eggs but market volatility is inevitable. With US bank Citi projecting inflation could breach
18 per cent next year, even cash is not immune to the wider risks.
One way to deal with volatility is to stop paying attention to short-term fluctuations. This is clearly harder than it sounds during a bear market and it is predicated on having a well-diversified and sound investment strategy to begin with.
Whilst it’s fair to say almost all asset classes have struggled this year, it’s important to remember the benefits of diversification and having a long-term plan and strategy.
It’s not unusual that the best and worst performing asset classes can change from year to year and often the best performing one year can be the worst the next. It’s the nature of the beast.
Predicting this with total accuracy is tough at the best of times – mainly for the foolhardy or those with an absolute confidence in their ability to see into the future – neither of which tend to make for the most effective investors or advisers.
So what to do?
A staggered exposure to multiple asset classes, depending on your risk tolerance, allows you to limit volatility during these testing times.
The last bear market was around March 2020 and tells us much about human behaviour but also about the markets – once they came to terms with the situation and the vaccines were announced, recovery was remarkably quick.
However, there are so many other factors this time and, with the best will in the world, the same rapid recovery is not expected this time and inflation will play a significant part in how things play out.
Investing is not an exact science and it is equally important to plan for downturns as well as positive returns. Anyone offering you promises and guarantees or fast high returns and low risks should probably be avoided, but at these times a regulated independent financial adviser can be your best friend. If you have one, speak to him or her, regularly. If you don’t, the best advice is to find one.
Keith Brooks is an IFA and chartered financial planner at Aberdein Considine.
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