Pushing aside the inauguration of Donald Trump, an Australian vote for marriage equality and the threat of nuclear obliteration, 2017 may well have been the “most boring year” in history... at least for markets.
That’s according to the founder and CEO of Stockspot, Chris Brycki. Speaking in an investment insight this week, he said market volatility has been “almost non-existent” and that share markets have also “risen with little sign of worry”.
“The US share market has only moved by 1 per cent or more 8 times this year, the fewest since 1964. It has also gone more than a full year without a 3 per cent move, which is the longest stretch on record.
“Calm markets means 2017 may go down in history as the most boring year in market history.”
Acknowledging that this is “of course fantastic news for investors”, Mr Brycki warned that this smooth sailing won’t stick around forever.
He said it’s likely that markets are drawing closer to a period of volatility, although a question remains as to when.
With that in mind, he suggested four strategies for investors preparing for “wilder times”.
1. “Only invest funds you don’t need soon”
“This should be an obvious one but people tend to invest too much of their savings when markets are calm,” he said.
“Low volatility markets lull people into a false sense of security due to ‘recency bias’ but you should never invest money that you need for short-term living expenses.”
He reminded investors that short run market returns are never guaranteed, so money needed for essentials should be set aside.
“As you invest longer, the probability of making a loss declines and the odds of making a positive return move in your favour. The odds don’t really stack up until you’ve invested for two years when you have an 80 per cent chance of being ahead.”
2. “Pick a strategy that’s consistent with your investment horizon”
Just because markets are calm doesn’t mean investors should move too far outside of their investment strategy, Mr Brycki said.
“The investment strategy you choose should reflect how comfortable you are with market falls and your investment time frame. How calm or volatile the market currently is should have no impact on your investment strategy as markets can change quickly and unexpectedly.”
3. “Have some funds available to invest if the market falls”
He asked investors to consider if, should the market fall 10 per cent, they would be able to “take advantage of the lower prices”.
“Having some cash set aside will help your dollar cost average and provide a psychological reassurance to protect your emotions if markets fall.”
In the instance that markets do fall, Mr Brycki said investors with that capacity would be able to buy more, “rather than be tempted to sell and run for the hills”.
4. “Ignore the market noise”
“As sure as night follows day you can be certain that when market volatility does return, commentators will get very excited and come up with all sorts of doomsday predictions.”
Noting this, he said investors need to be disciplined, ride out the commentary and stick to their portfolio guns.
“There is an immense temptation to get caught in the hype and sell when financial commentators are hysterical and markets are falling. Selling everything is never the right long-term decision and will mean you miss the markets rising again.”
He said as long as investors’ strategies align with their risk appetite and investment horizon, they shouldn’t need to take action to amend their portfolio should markets fall.
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