29 September 2022
If you’ve been reading the news lately, it’s hard to escape the mounting sense of doom and gloom: Markets continue to sell off; we’re back in bear market territory; the pound is crashing; energy prices continue to spike… the list goes on.
But if there’s only one thing you take away from this, it should be that the best way to weather any market downturn is to stay invested at a risk level you’re comfortable with. We explain more below.
The Fed hiked rates by 75 basis points last week. More importantly, it raised its interest rate projections for the next couple of years. The central bank now expects its benchmark rate to reach 4.4% by the end of this year and 4.6% in 2023, much higher than its previous forecasts.
This means that rates are likely to stay higher for longer. Markets were initially expecting the Fed to start reducing rates next year, but it’s now clear that the central bank sees rates staying elevated into 2024.
The Fed continues to be laser-focused on bringing down inflation, even at the expense of economic growth. And increasing concerns of an impending recession have been weighing on market sentiment over the past week.
The market’s cyclical nature means that periods of stock market declines have been, and will continue to be, normal parts of an investor’s journey.
With bear markets occurring every 3.6 years on average, any investor is likely to see at least 5 bear markets during their investing life.
Markets frequently experience periods of short-term volatility, but they trend upwards over the long term. This holds true even for the biggest bear markets.
Investors who experienced the Great Financial Crisis of 2008-2009 saw the market decline by 55% over 17 months. But if they kept their funds in the market, they’d have reaped significant gains in the decade that followed. Investors that kept investing when markets were at their lowest, through late 2008 and early 2009, reaped the biggest benefits.
Gritting your teeth and soldiering on through rocky markets is easier said than done. But having a strong understanding of your personal investment horizon and risk tolerance puts you in a good position to weather any market downturn.
Make sure you have cash for your immediate needs and a healthy emergency fund for any unexpected expenses, so you don’t have to dip into your investments.
Keep investing money you don’t need in the immediate future. Market recoveries can happen rapidly, and you wouldn't want to miss out on buying securities at their cheapest. Legendary investor Warren Buffett famously suggests being “fearful when others are greedy, and greedy when others are fearful”.
Keep investing into a diversified portfolio to help protect you from the risk of large declines in any single asset.
As always, we’re here to help. If you have any questions or want to reach out to us, our Client Engagement & Wealth Advisory team is just an email, WhatsApp, or phone call away.
Yours in investing,
Freddy Lim and Stephanie Leung