We all know the old saying ‘buy low, sell high’ – right?
As fundamental as this may seem, when the reality of a market crash sets in, we see behaviour move from rational to irrational as investors abandon their accumulated wisdom and succumb to the prevailing panic of the day.
However, as is often the case with old sayings, they are fundamental truths, which are supported by theoretical study. In this case, panic-selling at the bottom of the market engages both sequencing risk and longevity risk.
In time to come, books will be written about the investment markets we have all witnessed in the past few months, and scholars will complete PHDs on the underlying psychologies at play.
But what should we do in the moment?
It is absolutely important that investors avoid emotional, panicked decision making. Investors who panic sell run the risk of selling low and crystallising losses in their portfolios. Even now, as local and international markets have fallen precipitously, the fundamental tenets of good investment remain unchanged: Quality assets, quality structures and quality management.
Ask yourself the following questions:
- Are the assets in my investment portfolio of high quality?
- Will the assets in my investment portfolio survive this period of economic uncertainty?
- Does my portfolio earn sufficient income without having to crystallise losses?
- Have I assembled a trusted cohort of professionals: financial advisers, estate planners, insurance brokers and fund managers?
- Do I have confidence they will act as conservative stewards of my wealth?
As we emerge from the coronavirus, the pace of economic rebound cannot be guaranteed. What we do know is that investors who take a measured, calm and rational approach to their investments throughout this period will likely fare much better than those who allow panic to drive their decision making.
As mentioned, one of the largest risks that face investor portfolios of retirees or those leading up to retirement is sequencing risk. In short, this refers to the risk that you incur capital losses at the point of retirement or during retirement. At that stage, you simply won’t have time to wait for long-time market trends to recover your losses. Further, your losses are likely to be exacerbated by the need to sell assets at their reduced value to meet living expenses.
Failure to manage sequencing risk ultimately leads to elevated longevity risk, which is the risk of running out of funds in your retirement, or out-living your savings. This is a fundamental issue as we live longer, and particularly in the face of the market upheaval we are currently experiencing.
Of course, you can expect significant pressure to rebalance portfolios right now. The tumult in markets recently will undoubtedly have affected your portfolios and shifted the goalposts you had set in your retirement planning. Your financial adviser will be working to establish the best means of generating your portfolio objectives without significantly increasing risk or sacrificing capital values.
Indeed, keep assessing your portfolio: Ensure you have a trusted team around you to navigate this period; align yourself with fund managers and assets that have strong track records across multiple cycles; and ensure your portfolio aligns with your risk appetite.
Most importantly, take care not to make fundamental mistakes that may have a negative impact on your portfolio, or your lifestyle, for years to come.