THE Case to have a LONG-term VIEW: Market Fluctuations, Virus, Interest Rates, War & More…
Market fluctuations are inevitable. Various factors could impact the stock markets’ movements – ranging from the Covid-19 global health crisis and changes to economic conditions such as inflation and interest rate hikes, to geopolitical tensions and wars.
As the global economy gradually recovers from the pandemic following the lifting of lockdown measures, pent-up demand and supply chain disruptions around the world have combined to spur inflation. To curb inflationary pressures, major central banks are widely expected to raise interest rates and normalise their monetary policies. This, in turn, has resulted in elevated volatility in the global markets. Moreover, market uncertainties have further been exacerbated by the recent invasion of Ukraine by Russian forces.
Equity markets never go in one direction continuously. Markets may react negatively to near-term surprises but history has shown that markets eventually reflect their underlying economic fundamentals and earnings growth.
For instance, following the onset of the Asian financial crisis in 1997 and the global financial crisis in 2008, the equity markets have not only recovered their losses, but went on to post larger gains thereafter. In March 2020, the equity markets fell amid uncertainties over the worldwide spread of the coronavirus, only to subsequently rebound strongly to their pre-pandemic levels as economic activities began to recover following stimulus packages and easing monetary policies by governments across the world.
In the face of uncertain and volatile market conditions, investors tend to be over-anxious and are prone to making poor decisions, such as cashing out during a market decline. This may adversely impact the investors’ financial well-being as market downturns tend to offer potential investment opportunities to accumulate shares that have fallen below their fundamental values. By staying out of the market, these investors may miss out on buying opportunities.
Hence, buying and selling under the influence of emotions can reduce investors’ potential returns. In order to reap the benefits of equity funds, investors should keep in mind that the returns of these funds come from the discipline of remaining invested over the long term. This discipline enables investors to ride through short-term market volatility while tapping 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.
Adopting a long-term investment horizon also has the following advantages:
A longer time horizon will allow investors to take full advantage of the compounding effect of their investments. When a snowball rolls down the hill, it grows in size as it continuously picks up snow. Just as the snowball compounds during its travel down the hill to form a giant snow boulder, the returns of an investment are compounded as capital gains or income distributions are reinvested over time to generate even greater gains for an investor’s account. Therefore, the longer investors remain invested, the greater the potential returns they may reap from their investments.
Allows time for companies to grow
In 1997, Apple Inc. was on the brink of bankruptcy. Had its earlier investors pulled out their investments when the company was at its lowest point, they would not have been able to reap the rewards from their investments when Apple grew to become the world’s most valuable company. When investing in equity funds, investors should likewise bear in mind that it takes time for companies which the funds are invested in to grow and mature. What investors need to do is to set their investment goals, identify their risk tolerance levels, select the funds which suit both their investment goals and risk profiles, and focus on their long-term goals without being distracted by short-term market movements.
Keeps emotions out of investments
In the face of elevated market volatility, it can be challenging for investors to remain rational and calm. One of the common mistakes that investors make when they are influenced by emotions is ‘buying high and selling low’, which tends to cripple investors’ returns as investors buy more when prices are climbing to their highs, and sell their investments out of fear when prices are low. Instead, investors are advised to invest for the long term and adopt the Ringgit Cost Averaging (RCA) approach, where a fixed Ringgit amount is put into unit trust investments at a regular, predetermined interval regardless of the markets’ highs and lows. This strategy allows investors to average out the cost of their investments over time while taking emotions out of investing, as the consistent plan of regular contributions helps investors to avoid making hasty changes based on short-term market fluctuations.
Remaining invested over the long term could help investors keep the cost of their investments to a minimum and make the most of their returns. Conversely, impatient investors who perform frequent switching between funds in an attempt to improve their returns may have to incur additional costs on such transactions.
The key to investing is to remain focused on your investment objectives and to always keep your emotions at bay during periods of elevated market volatility. Hence, rather than buying and selling under the influence of emotions, investors should adopt a long-term investment approach and allow their investments to grow over time.
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.