SITTING TIGHT IN UNCERTAIN TIMES
Investors left licking their wounds after last month's
losses - the worst for stock markets in over a decade - might
be tempted to kick off the New Year with a withdrawal from
equities. However, while retaliating is understandable, it
is not sensible. If you are well invested with a good fund
manager, all the evidence suggests that the best thing to
do is nothing at all.
As investors steady their nerves in the wake of the worst year for equities in recent memory, it is hard to believe that twelve months ago global markets were enjoying the prospect of another bumper year. However, as the losses in many peoples' year-end statements will testify, such optimism was clearly misplaced.
Although stocks have now absorbed substantial price corrections, other factors are likely to prolong the global turmoil. Persisting uncertainty over Brexit, fears over the shifting relationship between China and the US and stagnating automotive markets in Europe and China will slow a global recovery. Closer to home, political uncertainty in Zimbabwe and South Africa, together with an unstable Rand, continue to spook markets whilst daily corruption scandals, mounting debt and a softening property market in Kenya will do little to reassure anxious investors there.
All this might make you want to run for the hills. Although recent newspaper articles make grim reading, accomplished investors like Warren Buffet would argue that, as long as you are sensibly invested, there is nothing to fear in the headlines but fear itself.
It is worth remembering that stock markets are for the long-term investor and tumult is the price you pay for returns that are substantially higher than those generated by cash or bonds. Over the medium term, markets will always rise and fall and the falls are essential for generating these long-term gains for investors. They follow a natural cycle of growth and consolidation.
This is why, when markets are depressed (consolidating), you should hold your nerve, sit tight and wait for them to reflate, as they have done in the past. For those who suffer from FOMO (Fear Of Missing Out), such periods might also be the best time to buy.
If, after receiving your year-end statement, remaining invested feels counter-intuitive, then consider the alternatives: there is not much to choose from. UK property has lost its shine thanks to Brexit and punitive tax and regulatory changes that have depressed real estate markets globally. Interest rates are rising but not enough to make Fixed Deposits attractive. On the other hand, any rises in interest rates threaten bond prices, creating a limbo scenario.
Even Bitcoin has finally converged with reality, tumbling 80% in value over the last 12 months. Converting to cash will ultimately leave you worse off. Critically, it will convert a paper loss into an actual loss and deny you the opportunity to benefit from the growth in equity markets as they rally back from current lows.
Sitting on your hands will, of course, only pay dividends if you are invested with sound fund managers. VFS's Investment Advisory Committee undertakes thorough due diligence before approving fund managers and regularly monitors their performance. They select fund managers who apply rigorous research and exacting standards to create intelligent portfolios of resilient businesses with consistently excellent performance. This is why our advisers are invested with the same fund managers that we recommend to our clients. Good fund managers give you the confidence to remain fully invested, even in a downturn, ultimately enabling you not only to survive the tumult but to profit from it too.
So once you have checked your risk profile, reviewed your position and confirmed that your structures and assets are sound, cost efficient and effective, you will be best served by an old proverb: "Sometimes it is better to do nothing than turn something into nothing."