Market turmoil: stay anchored to your plan

Market falls are normal and the current one was expected. The recent events may have unnerved you, but having a long-term goal in mind will help you to stay on course, writes Laura du Preez.

News about recent sharp falls in financial markets around the world have been dramatically documented in the media under headlines referring to “Black Monday”, “the worst-ever decline”, “a US$5 trillion rout”, and “the rand plummets to a new all-time low” against the US dollar.

It is enough to unnerve any investor, so it is reassuring to hear that asset managers were expecting a market correction, don’t foresee the end of the investment markets as we know them and, in fact, are seeing opportunities to buy into markets at lower prices (see “No bear – just a ‘market correction’”, right).

Long- term investors need to remember that short-term movements are “just noise”. A financial plan that sets out your investment goals and an appropriate strategy to achieve it is a good anchor that will ensure you aren’t at sea in the market storm.

A good financial plan should not only match your investments to your needs and investment time horizon, but also prepare you for the potential losses you may suffer over the shorter term.

If the turmoil in the markets and the effects on your investments was way too scary for you, you may need to revise your goals and your strategy, and give some thought to seeking shelter in investments with what is known as downside protection, as the volatility is likely to continue (see “How to deal with risk in your portfolio”, above).

RECENCY BIAS

Steven Nathan, the chief executive of 10X Investments, warns against making irrational investment decisions based on your emotional reaction to market volatility.

“Despite our best intentions and our awareness of market cycles, investors place too much importance on recent events and act in the belief that these developments will persist. This is called ‘recency bias’ and it causes investors to buy [when markets are] high and sell [when they are] low, which is the opposite of sensible investing,” he says.

Nathan says a long-term investment strategy will help you overcome recency bias.

“Setting the strategy upfront serves as a compass when the market is in turmoil, as a way to keep sight of the end goal, and a reminder to stay on course.”

The recent weakness in both the rand and the local stock market may tempt you to move money overseas, but although the momentum may seem favourable in the short term, it is impossible to say when this trend will reverse, Nathan says. Changing course now is tantamount to selling local investments low and buying offshore ones high, he says.

The rand collapsed in 2001 and again in 2008, and at both times transferring money overseas during the decline would have been the wrong move, in terms of the subsequent currency and local stock market performances, he says.

Nathan says investors should respond to developments by rebalancing their investments rather than by chasing recent market trends.

DARKEST JUST BEFORE DAWN

Commenting on the rand’s decline, George Herman, the head of South African Portfolios at Citadel, says “it is darkest just before dawn – the rand has now entered very dangerous and oversold territory”.

“The bounce-back could be swift and large,” he says, “and investors should only make new dollar investments as part of a long-term investment planning horizon and with severe caution.”