It would not be unreasonable to assume we are about to face a challenging year or two in the market.
There is some talk of a recession, particularly in the U.S., and every time you watch the news there are stories about increases to the cash rate (which were not supposed to happen until 2024), increases to mortgage payments, fuel and food, and volatility in commodity prices. Frankly, the news is depressing but we must all remember to keep it in perspective.
Inflation is increasing across most economies, supply chains have been disrupted by COVID-19 and are yet to recover, Russia’s war on Ukraine is having significant effects on the global oil trade. Australia has had floods which have impacted property prices and grocery prices.
These geopolitical and macro trends have seen the value of investments drop during the fourth quarter of 2022 but as at the time of writing, all losses on the S&P/ASX 200 and the S&P/ASX All Ordinaries Accumulation Index had been regained. This is the cycle of investments. Since the time of Tiberius, there have been crises and recoveries, as can be seen in the graph below which plots major movements since 1920.
{{< figure src="/images/downswing-chart.png" title="Chart 1 - Source: Fiducian, ASX, marketIndex.com.au. RBA. Disclaimer: Past performance is not a reliable indicator of future performance and investment returns are not guaranteed." >}}
Aside from constantly reminding yourself that this too shall pass (and it will), there are some other considerations to take into account so that you can survive a downswing.
When evaluating your investments, you have three choices:
- leave them untouched
- add to them (buy when you find something that is good value)
- sell (liquidating).
Analyse your investments and decide what is right for you; a strategy that gives you some peace of mind and considers potential consequences, such as tax.
Time in the market
Leaving investments untouched can be a wise choice if you have a diversified investment portfolio and have the time to wait out movements. It takes a steady hand not to panic or worry, but you only lose on an investment when you sell it. Don’t try to time the market, people very rarely get it right.
Straw hats in winter
Quality investments will rebound so you may wish to consider buying when prices are low and benefitting from that investment over the long term. Another option is dollar-cost averaging, whereby you continue to buy shares during the entirety of a market cycle so that over the long term, your cost will average out. Always look for good value opportunities and, in the share market, factor in their historical dividend payments, cash flow and balance sheet.
Sell and rebalance
Consider your overall portfolio of investments and ascertain their long-term potential. It may be time to sell an underperforming asset and redirect those funds into something else.
Eliminate debt
As much as possible, try to pay down debts such as credit cards or other high interest loans.
Build up your emergency fund
By having a few months of costs saved, or assets that can be easily liquidated, you will have some peace of mind if rates continue to increase, or if your promised wage rise does not come to fruition. Your key mantra during a downswing is don’t panic and don’t make decisions based on fears which could ultimately be detrimental to your overall position. Make sure you have a diversified investment portfolio and see an adviser if you need some reassurance you are following the right path.
For more information and tips on surviving a downswing, book a free consultation with Fiducian Financial Services.