The big unease: How to address investor anxiety
13 October 2017 | Markets and Economy
Vanguard Chief Executive Officer Bill McNabb.
Uncertainty surrounding politics, international relations and the global economy is fuelling general anxiety among investors.
"We've seldom witnessed such overt concerns from our clients regarding geopolitical issues: North Korea, Catalan secession, continuing instability in the Middle East and events in the United States," said Vanguard Chief Executive Officer Bill McNabb.
"What we're hearing is that all of these negative events are causing some clients to reconsider the wisdom of a long-term asset allocation," Mr McNabb said. "They believe that the market is poised for significant volatility, so they're thinking about getting out.
"The thing is, when markets respond to external events, they do so very quickly, and getting the timing right has proved impossible. With market timing, you have to know the answers to two questions: When exactly do you get out? And when do you go back in? Our research shows that the combination of mistakes people make there often costs them money."
Indeed, Vanguard research found that market timing shaves about 1.5% on average from investor annual returns. That's why it's important for all investors to remember uncertainty and risk are inherent aspects of investing.
"Experienced investors know that keeping a long-term view is key to investment success," Mr McNabb said. "That's a difficult message to hear and, for some investors, an even harder one to live by when uncertainty hits, but it's the wisest course of action."
Why you should stick with your long-term plan
Straying from a long-term financial plan is among the top reasons investors fall behind on their investment goals.
It's only natural to want to move to "safer" investments when there are unknowns with the market. But the simple truth is that changing your plan can put you at risk of not only getting it wrong once, but twice, especially if you're out of the market longer than intended.
There have been times in history, such as the financial crisis of 2008–2009, when investors later learned that making portfolio changes based on emotion was actually the worst thing they could have done.
How investors can prepare to weather the markets
So what can investors do?
While uncertain times are unavoidable, the good news is that one can prepare for them.
- Invest according to your goals. Take a careful look at your portfolio, and ask yourself if your overall long-term strategy is sound. Do you have the right asset mix for your investment goal and time frame? Are you properly diversified?
- Focus on the big picture. Your investment decisions should always be strategic and not based on whether the market is up or down. Step away from the news, and ask yourself, Does this event change my investment goals?
- Rebalance. Disciplined rebalancing is vital to achieving long-term goals. It keeps your investment risk in check with your long-term plan.
- Save more. Putting away something extra every opportunity you get isn't easy, but it can give you the flexibility to get through tough situations.
"No one can predict with accuracy what the market will do tomorrow," Mr McNabb said.
"That's why a long-term focus is so important. We believe in anchoring your investments to your goals in a well-diversified plan that you can stick with through all market conditions."
This article is directed at professional investors and should not be distributed to, or relied upon by, retail investors.
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