Oliver Cromwell, in the opening battle of the English civil war in 1642, is reported to have told his Roundhead troops, “Put your trust in God, my boys, but keep your powder dry.”
Or in today’s common application, “Keep calm and take precautions so you can ‘let rip’ when the opportunity presents itself.”
While today we are unlikely to be jumpy about the chances of being confronted by hordes of pike men, cannon balls and musketeers screaming toward us, in times of volatility, the principle remains generally the same. Keep your head, stay disciplined, address the bigger risks and get ready to act when needed.
Volatility is both a blessing and a curse. While very few enjoy a stomach-churning ride chasing returns, it is a fact of life that volatility also allows significant long term opportunities (or ‘bargains’) to be captured.
Of course, no-one would be so silly as to buy high and sell low, right? Especially because we know about a thing called the ‘cycle of investor emotions’. However, the actual evidence of investor behaviour, both here and overseas, clearly shows the opposite – buying when the market is high and selling low.
The key problem with volatility is it pokes the emotional response mechanisms in human nature. Often this takes the form of “don’t just stand there, do something!” The problem is, when markets have wild gyrations in very large ranges, without a clear overall trend direction, it is very easy to give in to your emotions, take big bets, and end up whip-sawed (a term used to mean getting ‘run over’ by a market reversal in a short period of time, before getting ‘backed over’ again as you exit just before the market finally moves your way).
In the present market, traditional asset classes look expensive, cash yields are low and getting lower, and the more you look around to generate returns the more you can be excused for feeling like one of Cromwell’s Roundhead troops – under siege.
So let’s take some sage advice from Cromwell
(On this point anyway… as he did, after all, end up being executed for high treason):
- Keep your head and stay disciplined – if a strategic investment plan has been well constructed, appropriately diversified, and built to survive through the ups and down of a full cycle, then trust it. If your strategy isn’t like this, then fix it. Don’t give in to emotional triggers for investment decisions, especially in times like the present.
- Address the ‘bigger’ risks – ensure your strategic portfolio is diversified, don’t pay too much for assets and allow enough flexibility to make adjustments, capture emerging opportunities and address emerging risks.
- Get ready to take action – many traditional asset classes appear expensive at present, but this does not mean everything is expensive. Even in traditional asset classes like shares and fixed income, there are significant pockets where valuations are more reasonable, if not cheap. This is where it pays to keep a little powder dry, so you can put some money to work to capture long-term opportunities if good assets get caught up in a broader sentiment-driven sell-off.
The bottom line – trust in a strategic investment plan
If it’s seen you through challenges before, it will likely do so again. To avoid getting whip-sawed, stay reasonably close to your strategic asset allocation – volatility increases uncertainty and, when most things are expensive and sentiment driven, don’t stick your neck out too far. Finally, stay flexible enough to capture value opportunities when presented by market over-reactions.
This combination of strategic discipline and ‘measured’ opportunism is what is needed to keep on track for meeting long-term goals. Please speak to your OBT financial planner in Gatton about your investment strategies on 5462 2277 today.
Source: Russell Investments