Breathe. It’s been a tough six weeks for investors and there are signs that the volatility will continue.
Concerns about Chinese and global growth have combined with worries about the impact of the looming Fed rate hike to roil markets. That’s put stocks under pressure all over the globe and in August the ASX had its fourth worst monthly return this century.
So, as the US Fed begins its two-day meeting tonight to decide whether now is the time to start lifting interest rates in the US, and as questions emerge about the global economic outlook, there is every chance that there is more uncertainty to come.
That won’t please many traders and investors.
It’s a topic that State Street Global Adviser’s Olivia Engel, head of active quantitative equities and Toby Warburton, senior portfolio manager, have addressed in their latest monthly recap.
Engel and Warburton note that during these periods of increased uncertainty and market dislocations, we have seen recently that many market participants get scared.
That’s as true of professional investors as it is of retail investors.
The problem of course is that the behavioural finance boffins tell us that losses loom larger than gains for investors. That often means that bad decisions, at odds with an investors’ long term goals, are made amidst the turmoil.
That’s a point Engel and Warburton make when they say, “the natural instinct to react to this fear, often without duly considering all the options and possible outcomes, and this may lead to poor decisions”.
Naturally that begs the question of how, or what, investors can do to protect against the short-term vagaries of market turmoil while still staying in the market for the long run.
The answer, according to Engel and Warburton, is fairly straightforward:
We believe that the key is being prepared for, rather than responding to, increases in market risk and building a portfolio that aligns with your own investment objectives over an appropriate horizon.
That means embracing uncertainty as part and parcel of investing and preparing for it.
It really is as simple, or as difficult, as that.
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