There’s no denying that the first six months of 2022 have been tough, for investors as well as for households and businesses. Skyrocketing inflation and worries about recession have negatively impacted both bonds and stocks. There is a temptation to sell but how investors react to volatility now could have a big effect on their long-term performance. We take a look at why.
The tough markets of 2022 so far
Usually, bonds can be relied upon when equities are suffering. 2022 has decided to buck that trend as shares and bonds have fallen in value concurrently. Even the most diversified of portfolios have suffered as a result.
We can put the blame for this at the door of rampant inflation. Inflationary concerns caused a fall in the value of bonds and saw stocks that have made gains in recent years go into reverse.
While the main concern in the first quarter of the year was inflation, more recently fears have intensified around an economic slowdown and a potential global recession. This has led to investors continuing to offload stocks. In better news, bonds have stabilised, contrary to expectations.
Markets always look forward and share prices are an indicator of expectations. Media hype and sentiment have a big influence which can trigger knee-jerk reactions from investors. However, in tough times, the most effective approach is to maintain discipline and resist the temptation to sell hastily in response to bad news.
Four pieces of advice for investors in 2022
1. Stay diversified
Although diversified portfolios have suffered in the current climate, diversification still remains a key defence to manage risk. We recommend that investors remain diversified across asset classes and sectors as well as geographically. This reduces over-exposure to specific risks.
2. Stay invested
Remember, if your portfolio is down, as long as you remain invested, that loss is merely a paper one. History tells us that prices will recover. Chances are that this time next year, markets will have bounced back, and you will have benefitted from a post-trough surge in stock prices. Panic sell now, and you could leave it too late to buy back in and miss the pre-rally sweet spot altogether. You’ll be turning a loss on paper into a concrete loss.
3. Focus on the destination
Markets are cyclical and volatility is to be expected. The ups and downs are part and parcel of investing if you’re in it for the long haul. Markets simply cannot go up indefinitely and similarly, they won’t go down forever. Riding out the short-term pain for the long-term gain is the best course of action.
4. Invest according to your risk profile
Investment managers project investment outcomes based on data. While they can’t know exactly when downturns will happen, they can and do build expectations into their models and classify portfolios in terms of long-term risk.
Our investment management partner, Evelyn Partners, offers portfolios composed with eight different risk profiles in mind and our financial planners take the time to work out which is best suited to you to maximise your chances of investment success. This should provide reassurance in these turbulent times.
What happens next to markets?
Central banks are focussing on bringing inflation under control and appear willing to sacrifice economic growth to do that. While it doesn’t look like there will be a swift end to the cost-of-living crisis that is being experienced in many parts of the world, there is a glimmer of hope with core inflation – with food and energy stripped out – falling.
The silver lining of an economic downturn is its likely highly disinflationary effect. Bear in mind too that governments and central banks have a number of fiscal and monetary tools at their disposal to stimulate growth and eventually these will be priced into markets.
The key message to investors is to hold your nerve. A rally will be round the corner, we’re just not sure how far round!!!
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