Article written by InvestNow – 1st April 2022

“Time is what keeps everything from happening at once.” 

If the famous saying – often (wrongly) attributed to either of the default quote guys, Albert Einstein and Mark Twain – is right then the events of the last couple of years might suggest the world is running out of time. 

Everything is happening at once: global pandemic; war in Europe; social disorder (remember Wellington); technological disruption; supply-chain squeezes; off-the-charts commodities prices (especially oil); surging broader inflation; and, rising interest rates. 

And while some of the above factors have been in play for years, the first few months of 2022 has brought them all together in an explosive mix of market volatility. 

After a relatively flat 2021, the NZX main index, for example, fell almost 10% in January before bouncing up and down 1 or 2% most days since. 

Similarly, the benchmark US share indices – the S&P 500 and Nasdaq – plummeted about 13% and 17%, respectively, early in the year. 

Pulled day-to-day in different directions by factors like the awful events in the Ukraine, coupled with inflation and interest rate fears, markets struggled to signal any clear direction. However, sharemarkets staged a minor recovery in March, rewarding investors who persevered rather than panicked. 

During these periods of volatility the fundamental time-proven investment principles of risk-appropriate asset allocation, diversification and planning come to the fore: some things never change! 

Of course, investors must stay informed of current events but they also have to ignore the noise. Unfortunately, the background noise has reached almost deafening volume in recent years as mainstream media amplify short-term market movements to play to the rapidly growing audience of retail share-trading platform users and KiwiSaver members.

Bad news sells; good investors don’t have to buy it, though.

But planning makes it much easier to block out the screaming headlines. A well thought-out plan is like a good set of noise-cancelling headphones, allowing investors to maintain a sound strategy despite the surrounding loud chaos. 

While everyone is different, the same concepts of investment planning based on building a portfolio around an appropriate risk profile (a mix of psychological and other factors such as time horizon) apply to all. 

Tools like the Sorted Investor kickstarter offer a useful way to establish risk profiles and suggest the broad types of investment strategies that match. 

A robust plan is a must have for every investor, reflecting it will provide investors with an invaluable anchor point when real volatility surges through markets. The experience of early 2022 has been a reminder that sharp market falls invariably come with psychological baggage, even for seasoned investors. 

Behavioural finance research consistently finds most people disproportionately fear losing money compared to the prospect of outsize gains. 

Investors who understand their psychological biases, have prepared a suitable long-term plan and expect to encounter volatility are far less likely to bail out at the first signs of serious market troubles.

As numerous studies have shown, attempts to time the market almost always end in value destruction. For example, a well-known analysis found an investor who missed the 10 best days in the US share market over the last 20 years would’ve generated a 5.2% annual return – or about half of the S&P 500 index performance of 9.4% over the same period. 

What are the chances of missing the 10 best days in US shares over the last two decades? The answer is higher than might seem intuitive given 70% of the top 10 days in US shares during the last 20 years came within about two weeks of the 10 worst days – or the very time when ill-prepared investors are most likely to jump ship. 

If education and planning form the basis of good investment, putting the plan into action also requires some care. 

For instance, regular investment plans – which set automatic contributions regardless of market conditions – offer a simple but effective way of negating the strong emotional urge to sell out when shares tank. 

Almost 6,000 InvestNow members have established a regular investment plan, suggesting the ‘set and don’t regret’ message is catching on. 

Investors, too, should never forget the power of diversification. Retail share-trading platforms all too often focus on glamour single stocks in their marketing campaigns; highlighting, for example, Tesla or promoting fashionable companies including the NZ shoe firm, Allbirds, which listed at a premium on the Nasdaq before slumping to less than half its original value. 

Investing, however, is serious, not glamourous. Building a diversified portfolio might not beat the thrill of a digital confetti-burst celebrating an online stock purchase but the long-term rewards are much more satisfying. 

During the 2022 market sell-off both shares and fixed income assets fell but the risk management qualities of diversification still shone through. 

As global share indices shed about 7% over January and February this year, the diversified InvestNow Foundation Series Balanced Fund fell only 5%; showcasing how diversification can cushion portfolios during market sell-offs and set the scene for a more rapid recovery. 

Naturally, a diversified portfolio won’t keep pace with an all-equities approach when share markets are constantly climbing but at some point downside protection will come into its own. 

A significant group of InvestNow members have certainly embraced the diversification concept, a recent analysis revealed. The study found an average holding of eight funds among the 1,000 largest portfolios on the platform, suggesting risk management is a core concern for these members. 

Right now markets might be digesting some momentous geopolitical events and important changes to financial dynamics but it’s not the time to abandon core portfolio management principles. 

The timeless risk management rules of diversification, long-term investing and understanding your own tolerance for volatility remain as crucial as ever. 

It is important that portfolio reflects your investment personality, goals and time horizon. If you’re not sure what they are, tools like the Sorted Investor kickstarter can help give you some direction, or find a financial adviser you trust. 

Market corrections, and periods of heightened market volatility, provide a great reason for all investors – even experienced ones – to re-examine their portfolio settings and investment beliefs. 

It’s not wise to hit the buy or sell button every time you read an apocalyptic headline no matter how different the market mood feels. As a long-term investor you will inevitably have to live through periods of significant market volatility and even large drawdowns. It is worth remembering, that we have been here before.

As the famous market saying has it, the four most dangerous words for investors are ‘this time is different’ in a quote probably credited to either Einstein or Twain.

Read our article “Sober investing tips – How to handle volatility” to see how InvestNow members have previously reacted to market volatility.