The importance of staying invested

Published by Lee Hayward on 6 May 2020

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The COVID-19 pandemic and associated lockdown from governments across the world is unprecedented, yet market volatility and downturns are a constant for every long-term investor, making it important for investors to understand what action they should take during these times.

Your financial adviser will take time to understand exactly how much risk you are prepared to take and how much loss it would be practical to sustain, constructing an appropriate portfolio and strategy around this. By diversifying that portfolio to meet the agreed risk mandate, it can be constructed to focus on your long-term goals – whether that is capital growth, an income or a mixture of both – to weather short-term volatility.

Whilst many investors will have experienced significant temporary falls in the values of their portfolios before, such as during the 2008 financial crisis, the situation today carries with it a global health issue and the concern that oneself and ones loved ones are at genuine risk of falling seriously ill. The economic impact is likely to cast a long shadow.

For some, this creates a perfect storm of emotion that can lead to an instinctive desire to take a flight to safety, exiting investment strategies in favour of cash.

Your financial adviser should look through the ‘noise’ and using their knowledge and experience, reposition investment portfolios to minimise the effect of sustained market falls, and then to identify the right time to start increasing portfolio risk in order to benefit when recovery signals are confirmed. Portfolios must be reviewed and re-balanced appropriately in order to reflect market views and to maintain the risk mandate.

Following advice to remain invested throughout times of market turmoil can be difficult. However, investors should take note that history demonstrates that holding your nerve is often the best way to ensure that long-term goals remain on track.

From 2000 to 2019, the Standard & Poor’s 500 Index had a compound annual return of 6.1%. But if the ten best days during that period were excluded, the index would have had just a 2.4% compound annual return. Excluding the 25 best days, it would have had a –1.0% compound annual return.

Holding your nerve and staying invested is of paramount importance, because one of those ‘best’ days could be just around the corner. These ‘best’ days are often grouped together with the ‘very bad’ days, making it extremely difficult to time a market exit and subsequent re-entry.

Over the last 120 years there have been 103 bull market years (where market prices have increased by 20% or more) and just 16 bear market years (where they have decreased by the same degree or more) and whilst these markets will last for varying lengths, bear markets tend to be far shorter and investors who have stuck them out have been rewarded for their perseverance.

So blank out the noise, focus on your long-term goals, trust in your adviser and hang in there for those ‘best’ days.

If you would like to discuss investing, or an existing investment portfolio with a Chartered Financial Planner, please contact Lee Hayward.

The content of this article is for information only and does not constitute formal financial advice.

This material is for general information only and does not constitute investment, tax, legal or other forms of advice. You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

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