After a strong start to year, continuing the theme of 2017 which rewarded investors taking a risk-on approach, markets plummeted last week with US equities recording their biggest drop since the 2008 financial crisis.
In response, eight fund managers last week outlined what they are doing with their portfolios, but what should advisers be telling panicked clients right now?
Behavioural finance expert Greg Davies of Centapse and Oxford Risk says that following an extended period of stability and quite significant returns, it is easy for investors to become complacent.
Indeed, a market drop of a few percent like the one last week can seem like a shock, but from a longer-term perspective most markets are still up over 12 months. Over history, a market drop of a few percent is quite normal.
The implication is it wasn’t really markets which were tested, it was test of complacency and psychology, according to Davies
Davies has three tips for protecting financial advisers and clients from the anxiety.
Stop paying attention
In the wake of turbulence, Davies has seen four types of experts and commentators; who are not helpful to long-term investors.
- Explainers (giving reasons why this happened now, a futile act according to Davies)
- Predictors (what is going to happen next, which is “equally futile”)
- Don’t panic-ers (these usually have the opposite effect)
“Stop paying attention to the short-term particularly anything which follows every up and down of the market, that stuff is harmful to long-term investors,” advises Davies.
“Sit down with a damp towel over your head and think what you are invested for,” continues Davies.
“If you have a diversified portfolio you will have some assets which are less susceptible to volatility.
“Now everything you want to buy is on a discount – you can take some of that dry powder and use it in this opportunity to buy and rebalance your portfolio.”
He adds: “A correction is a good thing for a long-term investor you just need to change your mindset.
“Unless you need the money in the next three-to-five years, the significance of last week’s volatility is almost negligible.”
Don’t change things just for the sake of it
“There is a natural human bias towards action – you feel you should be doing something,” says Davies.
“Don’t just do something, stand there. Do some portfolio house keeping use the rebalancing opportunity – make a list of small actions which will make you feel better but don’t do any big panic driven actions.”