Fear and Greed – How to beat market volatility

*This content is brought to you by Brenthurst Wealth

By Brian Butchart *

If you follow market news closely, you’ll no doubt have heard alarmist commentary about the Volatility Index reaching record levels. Somewhat appropriately, this measure is often referred to as the ‘fear and greed gauge’ because it reflects the mood in the market – rising when stock prices fall and dropping when prices rise.

For retail investors, this volatility is more than a catchphrase: it’s a reality that impacts your financial well-being. In extreme cases, some have seen their portfolios take a hit and have responded with outright panic. Historically and especially over longer periods of time ‘fear’ in that moment is usually a small blip on your longer-term financial plan.

The above graph of the S&P 500 illustrates multiple reasons for investors to have sold over more than a decade and at the same time the benefit of having remained invested and ignoring the short-term volatility.

Headlines and uncertainty cause panic and fear, which when looking back over longer periods of time seem less significant. Emotion and sentiment are huge drivers of the ‘fear and greed’ index. Seasoned investors and advisors are aware that uncontrollable events are reasonable and acceptable risks that influence market participants’ sentiment.

Behavioural science and in particular within the financial decision-making process has become far more important to advisors when guiding their clients to avoid making mistakes which can cost them dearly, especially impulsive decisions driven by either ‘fear or greed’.

From my own experience, over more than 20 years of advising clients, I am aware of my own and my client’s biases which impact decision-making, especially in a ‘fear’ driven event which inevitably makes us uncomfortable. It’s a human condition.

However, with experience comes wisdom and a deeper understanding of where to focus in times of uncertainty or volatility which impacts our emotions and sentiment towards our investment-related decisions. And this applies to any life situation, including personal relationships with friends, colleagues or family. Everyone can relate to regretting something said in the heat of the moment as emotion overrules sensibility.

So, what can you do to protect your investments in these turbulent times? Panic isn’t a strategy, so rather try to get a better perspective when markets get choppy. To help you do that, here are some strategies to consider.

Expect and accept volatility

Market volatility is a given. Rather than attempting to time the market, focus on time in the market. Historical data suggests that markets have consistently experienced steady gains over time.

Don’t abandon your plan

Understanding your financial situation is key. A sudden market drop can have different implications depending on your stage in life, your financial goals and underlying asset allocation. It’s essential to consult with your financial professional to minimise the impact of any impulsive decisions.

Stay invested

Short-term losses can be nerve-wracking, but making decisions based on emotions can be costly. The key to living with market volatility is focusing on long-term results. Staying the course can be challenging, but it can also create opportunities.

Stay diversified

Diversification is a basic principle in investing. Your portfolio may need to evolve as markets change. Times of volatility offer a great opportunity to re-evaluate and if necessary, rebalance your asset allocation.

Take an active approach to risk management

Being passive in the face of volatile markets isn’t advisable. This is your money and your future. Knowing your tolerance for risk is as important as being comfortable with your investment plan.

Talk to your financial advisor

If market volatility concerns you, don’t hesitate to seek professional advice. A financial advisor can help you review your financial plan and determine any steps you may need to take.

Stick to your long-term goals

Review your financial plan and determine if you’re still comfortable with it. Base decisions on your long-term goals and ignore daily market fluctuations. Your strategy should account for normal market volatility, so turn off the news and focus on the long term.

Examine your comfort level

If the current market downturn is hard to stomach, talk with your financial professional. You may find that a more conservative investment mix can alleviate your anxiety while still pursuing your financial goals.

Leverage low-cost index funds

Investing in low-cost index funds is a smart way to diversify your portfolio while minimising fees. These funds track market indices and offer exposure to a broad range of assets. Because they are passively managed, they often have lower fees than actively managed funds, which can translate to better returns over time.

Stay informed and adapt

Keeping abreast of market trends and economic indicators can provide you with the insights needed to make timely adjustments to your portfolio. Whether it’s a change in government policy or a new industry trend, being informed allows you to adapt your investment strategy accordingly. This proactive approach can help you seize new opportunities and avoid potential pitfalls.

By adhering to these principles, you can weather the financial storms and if in doubt consult a professional who can guide and assist in keeping your long-term objectives on track.

* Brian Butchart, CFP® is the Managing Director for Brenthurst Wealth [email protected]

Brenthurst Wealth Management

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