Financial perspective – hold your nerve

Faced with falling portfolio values and rising prices, anxiety is inevitable, but you need to hold your nerve. Periods of extreme uncertainty are unsettling.

Stock markets can experience sharp and unpredictable price movements. When these movements happen over short periods, the market is said to be ‘volatile’. We expect temporary volatility from time to time, and it can happen suddenly for many reasons, often because of geopolitical and political events.

The war in Ukraine, the global pandemic, the cost-of-living squeeze, and volatile financial markets have impacted global economic prospects. Your pension and investment portfolio may be negatively affected by this period of instability.

You may have considered making changes to your financial strategy because worry often drives us to react impulsively as we seek immediate comfort.

Managing anxiety around our investments is easier said than done. Holding your nerve can feel challenging.

With doom and gloom on the news and social media, what can you do to avoid any urges to react and disinvest?

Maintaining perspective

Keep your financial perspective focused on your longer-term goals and:

Try to balance emotional and rational responses
Avoid being overly cautious
Look beyond this period of volatility
Take professional advice – don’t make rash decisions

Emotions

Getting an instant valuation of your investment portfolio or pension is easy with online tools and platforms. A survey of customers of two investor apps found that almost half (49%) of investors review their investment performance daily.

If you’re checking your account balances and investment valuations every day, you’re probably feeling like a rabbit caught in headlights. You may feel highly engaged, but you could be causing yourself unnecessary stress.

Excessive monitoring of short-term returns can lead to anxiety about overall performance against your financial plan. High-frequency checking can also adversely alter your attitude toward loss. Nobel Prize-winning research[i] shows people weigh financial gains and losses differently, often feeling loss much more keenly than they appreciate an equivalent increase.

Also, our emotional time horizons can shorten when markets are highly volatile. Emotional stress can heighten our behavioural biases and lead us to make knee-jerk reactions and rash investment decisions, potentially reducing our long-term returns.

Attitude to risk

Concern about a downturn in your asset values might make investing appear riskier, as the probability of making a loss tends to be higher when viewed over short periods. Making changes to reduce short-term risk can divert you from your overall plan to protect and grow wealth over the longer term.

Bear markets are often the most challenging for investors. Significant falls in market valuations may feel like personal failures. You may question the advice you’ve received, the diversity of your portfolio and your fund choices.

Remember that daily, weekly, and monthly numbers are a distraction from your long-term goals. Disciplined and patient investors can achieve life-changing returns. Stock market volatility is inevitable, but history shows that falls are common and rarely last very long.

It’s important not to panic. Seek professional advice and take time to think through what you plan to do.

“Never make a permanent decision about a temporary situation.”

T D Jakes

The urge to hold more cash for fear of losses can lead investors to miss out on opportunities when markets are particularly volatile.

The time your money is in the market, not market timing, is key to long-term success. Being out of the market will inevitably mean missing out on the best gains.

The S&P 500 is recognised globally as one of the premier benchmarks for the U.S. stock market’s performance. In March 2009, the S&P 500 reached its lowest point, but by the end of the year the market was back up by 65%, more than recovering the previous year’s losses.

If you are daunted by being invested when markets are incredibly volatile, turn your thinking on its head and look at what you want to achieve.

Taking a long-term view

While it’s not always the case that investments will do better over the long term, holding your portfolio through market cycles will give your funds more opportunity to bounce back from any downturns.

Barclays’ recent research shows that by investing in UK equities for two consecutive years, the probability of outperforming cash and UK government bonds is 69%. Over ten years, this rises to 91%.[ii]

If your income supports your general living expenses and you have enough spare cash for emergencies, your investments will likely be focused on the future.

If you have no immediate need for extra cash to cover your day-to-day costs, remaining invested means you will benefit from the eventual recovery. Taking a long-term view will make the current volatility seem far more manageable.

Your pension and investment portfolio should reflect your overall financial plan. The success of your plan depends on setting realistic and achievable goals, but success should also be measured by how you feel along the journey.

If you feel anxious about your funds and performance or need reassurance that holding your nerve is a sensible strategy, speak to your financial planner.

Key Takeaways

Losing money is painful. It’s less challenging to make rational decisions if you understand your own attitude to risk and the risk profile of your investments.
Remaining invested through short-term volatility is often the key to longer-term success as an investor.
Managing your anxiety during periods of volatility is essential to maximise the potential of your investments.
To measure the success of your pension or investment portfolio, you need a combination of suitable investments and the right investing mindset.
When stock markets become volatile, it’s important not to panic. Sometimes doing nothing is the best course of action.

Hold your nerve.

If you’d like to talk to me some more about this, please feel free to get in touch and book a free discovery call with me.

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[i] Prospect Theory: An Analysis of Decision under Risk, Daniel Kahneman; Amos Tversky, Econometrica, Vol. 47, No. 2. (March 1979), pp. 263-292.

[ii] Barclays Equity Gilt Study July 2022

Past performance is not a guide to future performance.