Investors should consider whether they are willing to, or able to, financially and emotionally ‘ride the storm’ of volatile share markets. For those investors with long-term horizons until retirement, the plan to 'batten down the hatches' and wait for markets to recover could be the best course of action. Panic selling in the face of market volatility has been shown to destroy significant wealth from investment portfolios.
In volatile markets, continuing to hold equities can be especially important for SMSF investors or retirees who rely upon these investments for regular income and franking credits, but who can’t afford to suffer significant losses. For these investors, completely leaving the equity markets (for example, by allocating entirely to cash) can be another mistake, as they are unlikely to get adequate income returns from cash holdings, especially after accounting for inflation.
Another common error we are seeing is investors believing that today’s market environment is a ‘stock pickers' market’ and therefore they invest in a small number of stocks in a concentrated portfolio. I think this is a great exaggeration, and with many key players predicting equities will be in for a tough time, it is especially important for investors to diversify. I strongly encourage investors to broaden their horizons during periods of instability, whether it be through diversifying equity portfolios or allocating to asset classes other than cash, property and equities.
Many investors are doing this already – which we can see through the increased level of interest in gold recently. Gold has re-emerged as an in-demand commodity, significantly increasing in value in the past few months. Gold is traditionally a safe haven asset, so we can see many investors turning to this traditional refuge as central banks pursue negative interest rate policies.
My concluding thought for investors would be not to jump to unnecessarily negative conclusions – it is not all doom and gloom at the moment, and there are still some excellent investments out there. Remember to do your research, know yourself and be comfortable you have adequately prepared your portfolio for volatile times.
Alex Vynokur, managing director, BetaShares