Overcoming Market Turbulence with A Disciplined Approach
Uncertainty has long been a defining characteristic of financial markets. However, unit trust investors who remain focused on their investment objectives and keep their emotions in check tend to emerge as winners during turbulent times.
Fluctuations are an inevitable feature of stock markets. Changes in market sentiment, economic trends and liquidity conditions are factors that cause stock markets to be volatile. Consequently, emotional responses to market sell-offs can cause investors to make impulsive decisions.
Regardless of the problems that should arise, there are several solid investing strategies that have withstood the test of these uncertain periods. Here are a few tips on how investors can weather the ups and downs of turbulent markets:
Do not panic during market downturns
Due to changes in market sentiment, market fluctuations are inevitable. When markets decline, investors tend to be over-anxious and are prone to making poor decisions. This may be harmful to an investor’s financial well-being as initial investment plans are arbitrarily changed or abandoned. Remember to keep a clear and rational mind when assessing the impact of the market on your funds’ performance. Market downturns offer potential investment opportunities for long-term investors to accumulate shares that have fallen below their fundamental values.
In order to reap the benefits of equity funds, investors are reminded that the returns of these funds come from the discipline of remaining invested over the medium- to long-term. This discipline enables investors to tap into the long-term growth potential of companies that the funds are invested in. In other words, investors have to remain patient to allow their investments to grow over time.
Consider your investment horizon
If time is on your side, there is little need to worry about short-term market fluctuations as they will eventually even out over time. A longer time horizon will allow you to invest in more volatile investments while at the same time take full advantage of the compounding effect of your investments. Likewise, the shorter the investment horizon, the more conservative one’s investment strategy should be with more weightage given to fixed income funds.
Mitigate risk by diversifying investments
In view of how business cycles can adversely affect a particular sector or economy, it is always safer not to put all your eggs in one basket. While investing in a narrow range of sectoral theme funds or single country funds may produce attractive returns when they outperform, your returns may be adversely affected when these sectors or markets slow down.
Thus, investors should select funds with different asset classes that do not move together so that market swings in one part of their portfolio are offset by another part. Failing to diversify may leave investors vulnerable to fluctuations in a particular sector or market. In addition, investors should be mindful that owning many funds which focus their investments in a particular sector or market does not necessarily equate to being invested in a diversified portfolio of sectors and markets.
Time in the market is better than timing the market
Timing the market is far less important and far riskier than ‘time’ in the market. When the market consolidates, some investors tend to panic and impulsively redeem their investments. After cashing out of the market, they attempt to catch the market “at its bottom”. However, when the market rebounds, it may be too fast for them to re-enter the market.
Investors who opt to stay out of the market during consolidation periods are not able to profit from capitalising on low market prices. Meanwhile, investors who practise Ringgit Cost Averaging (RCA) strategies continue to invest steadily during such periods and reap the benefits of market lows. Thus, RCA is a disciplined approach to investment that enables investors to ride through the highs and lows of markets.
The RCA approach takes the guesswork and emotion out of investing. This method allows you to average out the cost of your investment over time as you will buy fewer units when prices rise and more units when they fall by investing a fixed Ringgit amount into unit trust investments on a regular basis. This time-tested practice allows you to ride through market fluctuations in pursuit of long-term capital growth as it mitigates the volatility of markets over time.
These simple steps in careful planning and maintaining a disciplined approach can help you make better decisions for your financial well-being and long-term investment performance.
This article is prepared solely for educational and awareness purposes and should not be construed as an offer or a solicitation of an offer to purchase or subscribe to products offered by Public Mutual. No representation or warranty is made by Public Mutual, nor is there acceptance of any responsibility or liability as to the accuracy, completeness or correctness of the information contained herein.