The global market’s rollercoaster returned a few weeks ago. After a long period of relative calm, recently we saw it get unnerved with China’s decision to devalue the Yuan, slash interest rates and cut reserve requirements for banks. Meanwhile, the uncertainty around when the US Federal Reserve finally raises short-term interest rates hasn’t helped either. This leads to more pressing questions relevant to your personal portfolio: What’s your strategy to navigate the market volatility? Your answer will shape your performance, even if the markets continue to rock.
As we write, the ASX 200 is down 2.7% this year while the S&P 500 is down 3.4%. It is easy to fall prey to panic when the world around us appears ready to crumble. We tend to second-guess our investment decisions, eyeing an exit before the market collapses. Kneejerk reactions, though, lead to poor long-term decisions. As we know, investing is as much about analysis of companies as it is about maintaining good discipline. It’s difficult not to buy into the gloom-and-doom you’re seeing on television. However, you’re better served by tuning out the short-term noise. Staying calm and keeping your nerves will likely provide better returns over time.
Stay the course
Remaining committed to your investment process is critical when the market struggles. After all, a structured process and discipline provide the two pillars of an effective investment strategy. In light of the new information coming out of China, you should re-evaluate your current portfolio and understand the key risks that you face if the Red Giant sees slower growth. Will this new normal materially change the outlook for the companies in your portfolio? What’s the worst-case scenario?
You may want to run a stress test on your portfolio. If things have materially changed it may warrant an action on your part. However, stick to your process – whether you’re a value investor, driven by a momentum strategy, or by something else. Styles move in-and-out of favour, but if you believe in a specific philosophy then stay the course even in the face of uncertainty.
Use the opportunity to buy
Investors tend to exit markets or asset classes, selling indiscriminately when panic strikes. Emerging market equities, in particular, highlight this sell-off. While it’s certainly true that many emerging economies face severe pressure with a slower-growing China, not all companies struggle equally. Take a step back and think: What companies have taken a beating, but are otherwise well managed businesses? Companies that have solid balance sheets, with a domestic focus and limited USD denominated debt are likely to have a better opportunity than businesses that primarily depend on exports. You can find gems in the rubble if you look hard enough.
It is difficult to time the market. Have we bottomed out yet? Possible. Could more cuts come? Possible. You can over-analyse the direction and timing, but very few people (if any) know where the market is headed. But volatility and uncertainty can present opportunities for great investments. If there’s excess cash lying idle, this could be a good opportunity to put it to work.