The realities of investing – markets go up and markets go down

As we navigate the current landscape, it’s essential to remember that market fluctuations are a natural part of investing and annual returns often look nothing like the long-term average.

Market fluctuations are normal

Although the long-run trend is upwards for sharemarkets, along the way there will be small declines, corrections (falls of 10% or more) and bear markets (falls of 20% or more).

The US sharemarket is currently down 14% from its peak in February this year to today.

Markets can go up and down

While nobody wants to see the value of their portfolio decline, it’s a natural part of the market cycle and should be viewed within the context of your long-term investment strategy.

The reason to invest in growth assets like equities and alternatives is to build your wealth over time. A degree of risk must be taken to achieve returns that beat inflation and cash held in the bank.

In reality, this means participating in market ups and downs.

However, a number of investment strategies can be adopted to help mitigate risk.

These include ensuring your portfolio is well diversified, investing in instalments, staying invested during challenging periods, viewing volatility as an opportunity to invest for the long term, and sticking to your plan.

A look at the recent downturn

Let’s consider the recent downturn in the US sharemarket.

The S&P 500 index has gained well over 50% since the beginning of 2020, pushing the valuations of some companies and the broader market to elevated levels.

When investors are optimistic and anticipate a continuation of exceptional growth from companies, even positive financial results can lead to weaker share prices. This happened during the most recent reporting season in the United States, which by all accounts was better than expected.

The ‘Magnificent Seven’ pushed the S&P 500 higher over the last two years, but have since contributed to the selloff this year. Investors have moved away from these technology companies and towards inexpensive businesses and sectors like healthcare and consumer staples.

A lot of the recent selloff can be laid at the feet of President Trump and the uncertainty his aggressive and ever-changing policy announcements have created.

Bull and bear markets in the United States

However, elevated valuations and an unwinding of concentration are also playing a part.

Investors who entered the US sharemarket before or during 2020, or at the peak of the COVID-19 recovery in 2021, should have benefited from these gains. However, newer investors may have seen the value of their US holdings move lower and have been subjected to alarming news headlines along the way.

This is why investors should take a long-term view.

The US economy has been in recession 14% of the time since 1954, which is equivalent to about ten years. Most of these recessions have coincided with a bear market.

History shows that the US economy and sharemarket have always recovered, and this time is not expected to be any different.

Asset allocation matters

It’s also why your investment adviser completes a risk tolerance questionnaire with you before implementing a portfolio. It’s important to understand how comfortable you are with fluctuations in your portfolio’s value, particularly during downturns.

It is this work that helps to determine the most suitable mix of assets for you. Deciding on the right asset allocation is a key step in the investment process, as it influences how much volatility you experience.

Investors should also view their portfolios as a whole. The asset classes, regions and sectors you invest in all play different but vital roles in your portfolio, helping to balance risk and return.

For instance, a fixed income allocation can serve as a stabilising force during volatile periods in sharemarkets, helping to protect returns.

Furthermore, some alternative asset managers employ strategies designed to deliver value in all market conditions, providing additional protection for investment portfolios.

These managers invest in real assets like infrastructure and property, as well as a range of private equity investments and hedge funds. This multifaceted approach ensures that portfolios are well equipped to navigate different market conditions, offering both stability and the potential for growth.

While living in a 24/7 news cycle can make it difficult to bury your head in the sand and avoid the constant barrage of headlines, some head burying is sensible.

Ignoring short-term noise in the financial markets, and holding at bay your natural instinct to run when things get tough, are important for successful investing.

Have confidence that your investment adviser is focused on achieving the best outcome for you and is well supported by our research teams.

Understanding that markets can go up and down, that corrections are normal occurrences and that various investment strategies help to minimise the impact of downturns will keep you on track with your long-term investment goals.

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This is an excerpt of an article published with the title ‘Up and down’ in the latest edition of our flagship publication for clients only, News & Views. Craigs Investment Partners clients can view News & Views, including the full version of this article by logging in to the client portal.

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