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15 July 2022

Staying the Course

Staying invested through market turbulence is easier said than done. Money is an extremely emotive subject as it provides a foundation upon which we decide if our lives will be comfortable or not. When faced with falling portfolio values, our innate response is to avert further losses and protect our money by withdrawing. Even as investment professionals, we have that same battle with our emotions at the sight of falling markets. A screen of red can be alarming, which evokes a true sense of grief. It feels like your hard-earned money has gone up in smoke and you wish you’d left it in the bank instead. Does that sound familiar?
 
You’re not alone in your response, and it is perfectly natural to mourn. But let us not be hasty; some of you reading this will have been here before (likely many times). Financial markets have ebbs and flows akin to your fluctuating fashion sense (See: Property and its long-term defensive qualities), but if we take ourselves out of the metaphorical reflection of our teens and twenties for a minute, let’s focus on the important facts; losses in your portfolio are only losses once they have been realised. In other words, if you don’t ‘sell’ you haven’t lost anything.
 
That’s all well and good, but I hear you ask – when will my value be back at where it was? Well, frankly, that question would require a magical superpower, and timing the market in the real world requires the guesswork of selecting the Grand National winner. Your neighbour might gloat at how well they did to sell at the top and buy at the bottom, though playing this game only increases the risk of loss. In fact, our own analysis of long-term markets demonstrates an indisputable correlation between the length of holding an investment and overall portfolio growth (See Time in the Market, Not Timing). This powerful message is what guides us rationally through harder times and helps us remove the behavioural biases that trigger our natural fight or flight response (See: An Introduction to Behavioural Finance).
 
Of course, staying invested is only effective if you make sound investment decisions in the first place. Diversification is a strategy that we have covered before, but alongside this, we need quality. As evidence shows, investing in high-quality assets provides an investor a long-term consistency of returns. Yes, sentiment will drive short term knocks to share prices, but do you really think a company like Microsoft is justifiably worth less than it was yesterday. Do you really think it won’t grow any more from here? (See: Microsoft: Can this Powerhouse Continue to Perform?).
 
Our evidence-based approach is one that is time tested. With every systemic event, we find ourselves returning to this data for assurance. Be it a global financial crisis, a pandemic, and now rampant inflationary pressures, they are all the same – sharp shocks, but not everlasting.
 
This article was taken from the February 2022 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
Staying the Course

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