When someone shares with you something of value, you have an obligation to share it with others.
Monday, 8 December 2008
Don’t let fear chase you from a plunging market
Nervous markets create opportunities, but you will have to battle your emotions to keep your portfolio on course and stay committed to your long-term strategy.
Nervous markets create opportunities, but you will have to battle your emotions to keep your portfolio on course and stay committed to your long-term strategy.
It may take some time for the seeds of recovery to grow, but they will grow, and financial markets will eventually recover. But for now, they seem to be in a constant state of upheaval. Frustrated investors feel as if every time they see a light at the end of the tunnel, a new storm shows up to blow out the lamp.
With anxiety swirling, many investors have abandoned any asset thought to be risky. As a result, investment in every corner of the capital markets now offers substantial potential for extra returns.
This “risk premium” has soared along with fear, and history shows that investments made in these moments of distress, when the potential for returns is much higher than normal, are usually the most rewarding.
But to reap those rewards, you will have to follow the time-tested approach of staying invested for the long term - even though this entails living with anxiety. The flow of individual investors’ money in the current crisis shows that, in the battle between emotion and sound strategy, emotion has taken the upper hand. Many investors have abandoned long-term strategies for the perceived safety of cash.
It is human nature: in challenging times, our emotions tell us to pull out of the markets and run for the hills. However, this creates two big problems. First, it is hard to see opportunities from far up in the hills. And second, when markets turn around, it can take too long to climb back down and get invested again.
Take the last major bear market, which was triggered by the bursting of the technology bubble in early 2000. By September 2002, stocks had fallen 47 per cent globally. Many investors undoubtedly felt the urge to walk away. However, stocks gained 25 per cent over the following year, and 116 per cent by the next peak.
Selling during periods of market stress may cause you to feel the pain of loss twice: first, you lock in your losses; then you risk missing out on the market’s eventual recovery. And you will always have less savings to build on than if you had stayed the course. This is not to suggest that it is easy to weather the storm. But there is a need to divorce emotions from practical portfolio decisions. Mind you, it can mean a ticket to an upset stomach when markets are gyrating, losses mounting and doubts swirling.
But instead of fighting an exhausting battle with your emotions, develop a diversified, long-term strategy and stick to it. After all, your long-term goals do not change overnight - so why should your portfolio?
Work with your financial adviser to design - and maintain - an investment mix that meets your long-term goals. Or consider investing in a diversified asset allocation portfolio that keeps you on track with automatic rebalancing. And you will rest assured that it will keep working for you the way it was designed - and you will not have to stay awake at night.
Augustus Cheh is CEO of AllianceBernstein Hong Kong, a member of Hong Kong Investment Funds Association
1 comment:
Don’t let fear chase you from a plunging market
Augustus Cheh
7 December 2008
Nervous markets create opportunities, but you will have to battle your emotions to keep your portfolio on course and stay committed to your long-term strategy.
It may take some time for the seeds of recovery to grow, but they will grow, and financial markets will eventually recover. But for now, they seem to be in a constant state of upheaval. Frustrated investors feel as if every time they see a light at the end of the tunnel, a new storm shows up to blow out the lamp.
With anxiety swirling, many investors have abandoned any asset thought to be risky. As a result, investment in every corner of the capital markets now offers substantial potential for extra returns.
This “risk premium” has soared along with fear, and history shows that investments made in these moments of distress, when the potential for returns is much higher than normal, are usually the most rewarding.
But to reap those rewards, you will have to follow the time-tested approach of staying invested for the long term - even though this entails living with anxiety. The flow of individual investors’ money in the current crisis shows that, in the battle between emotion and sound strategy, emotion has taken the upper hand. Many investors have abandoned long-term strategies for the perceived safety of cash.
It is human nature: in challenging times, our emotions tell us to pull out of the markets and run for the hills. However, this creates two big problems. First, it is hard to see opportunities from far up in the hills. And second, when markets turn around, it can take too long to climb back down and get invested again.
Take the last major bear market, which was triggered by the bursting of the technology bubble in early 2000. By September 2002, stocks had fallen 47 per cent globally. Many investors undoubtedly felt the urge to walk away. However, stocks gained 25 per cent over the following year, and 116 per cent by the next peak.
Selling during periods of market stress may cause you to feel the pain of loss twice: first, you lock in your losses; then you risk missing out on the market’s eventual recovery. And you will always have less savings to build on than if you had stayed the course. This is not to suggest that it is easy to weather the storm. But there is a need to divorce emotions from practical portfolio decisions. Mind you, it can mean a ticket to an upset stomach when markets are gyrating, losses mounting and doubts swirling.
But instead of fighting an exhausting battle with your emotions, develop a diversified, long-term strategy and stick to it. After all, your long-term goals do not change overnight - so why should your portfolio?
Work with your financial adviser to design - and maintain - an investment mix that meets your long-term goals. Or consider investing in a diversified asset allocation portfolio that keeps you on track with automatic rebalancing. And you will rest assured that it will keep working for you the way it was designed - and you will not have to stay awake at night.
Augustus Cheh is CEO of AllianceBernstein Hong Kong, a member of Hong Kong Investment Funds Association
Post a Comment