Following a large fall in investment markets, a question which often follows is, is now a good time to invest?
We have spent considerable time in the past considering this question, and ultimately believe the response is that we are not in the game of trying to predict these moments, because the likelihood is the call will be wrong.
What we believe is more important in these times is to consider a different question: am I invested correctly in conjunction with my tolerance for risk?
Key takeaways
- Trying to predict short-term market moves is difficult, and the call is often wrong.
- The more useful question is whether you're invested correctly for your tolerance for risk, not whether now is the "right" time to invest.
- Asset allocation, your split between growth and defensive assets, should guide your decisions, not market sentiment.
- Stress test your portfolio by considering whether you'd stay comfortable with your holdings if markets fell further.
- Volatility is part of long-term investing, and is the trade-off for the stronger returns growth assets can offer over time.
Why doesn't trying to time the market work?
Taking this approach helps to remove the emotion that naturally comes when dealing with investment markets.
All too often, we become worried about markets continuing to fall after they have already had a decent fall, mainly because everyone becomes pessimistic about the future.
Commonly, there is more risk in markets when everyone is optimistic, as prices are much higher.
The Importance of Asset Allocation
At all times, we discuss with clients the importance of asset allocation, that is, having the correct split between growth and defensive assets within your portfolio, in line with your personal tolerance towards risk.
This is what should ultimately guide your decisions around further investments.
Therefore, at a time when markets have fallen and sentiment is uncertain, we would suggest the wisest thing to do would be to review your asset allocation, to determine how much of your investable assets you wish to have in growth assets. This will then guide the answer as to whether you should be investing further.
Whilst this may result in you being incorrect in the short term, if markets continue to fall, this strategy will likely smooth out your returns over a longer period.
How does asset allocation work in a falling market?
This may mean re-allocating assets which have previously fallen into the defensive category across into growth assets, to ensure your portfolio remains aligned with your investment risk tolerance.
The opposite also occurs in rising markets, which is why we are open to taking profits on growth securities on strength.
Stress Testing Your Portfolio
The famous investor Warren Buffett has been quoted in the past as saying, "only when the tide goes out do you discover who's been swimming naked."
This quote also has great importance in current markets, whereby you should stress test your portfolio by looking at the securities you hold, and considering whether you would continue being comfortable with your holdings if the market were to fall further.
Why is volatility part of long-term investing?
Falling markets aren't comfortable for investors or advisers alike. However, we know volatility is required, as this is what will allow stronger returns to be generated over the long term.
While there may be further weakness in the short to medium term as we see a multitude of factors play out, we continue to believe investment markets offer great opportunity over the long term, if managed correctly in conjunction with an investor's tolerance for risk.
What to do next
Falling markets test every investor's discipline. The most useful thing you can do is not guess where markets go next, but make sure your portfolio genuinely reflects your risk tolerance.
Speak with a Morgans financial adviser to review your asset allocation and make sure your portfolio is built to handle volatility.
Whether you're looking to buy and sell shares, diversify with ETFs, invest in line with your values through ESG investing, get access to IPOs and share offers, or balance your portfolio with fixed interest, a Morgans adviser can talk you through what fits your situation.
Frequently asked questions
Should I sell my shares when the market falls?
Reacting to a fall by selling can lock in losses. It's worth reviewing whether your overall asset allocation still matches your risk tolerance, rather than reacting to the fall itself.
How long do market downturns usually last?
This varies and can't be reliably predicted. It's one of the reasons a long-term investment horizon, and a focus on asset allocation rather than timing, matters.
What is asset allocation and why does it matter in a downturn?
Asset allocation is the split between growth and defensive assets within your portfolio. It should be set in line with your personal tolerance for risk, and reviewed when markets move significantly.
How do I know my tolerance for risk?
This comes down to how comfortable you genuinely are with the ups and downs of your investments, including the possibility of further short-term falls. Speaking with a financial adviser can help you assess this properly.
Why is volatility described as necessary for long-term returns?
Growth assets that offer higher potential returns over time also tend to carry more short-term volatility. Accepting this volatility, rather than reacting to it, is part of how those stronger long-term returns are generated.
