The Best Strategy When Markets Fall

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By Boh Burima

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17 April 2020, 10:40 AM

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Following such a large fall in investment markets, a question which often follows is “is now a good time to invest?” We have spent considerable time in the past considering this question, and ultimately believe the response is we are not in the game of trying to predict these moments because the likelihood is the call will be wrong. What we believe is more important in these times is to consider, “am I invested correctly in conjunction with my tolerance for risk”. Taking this approach helps to remove the emotion naturally comes when dealing with investment markets. All too often, we become worried about markets continuing to fall after they have already had a decent fall, mainly because everyone becomes pessimistic about the future. Commonly, there is more risk in markets when everyone is optimistic as prices are much higher.

At all times we discuss with clients the importance of asset allocation, that is having the correct split between growth and defensive assets within your portfolio, in line with your personal tolerance towards risk. This is what should ultimately guide your decisions around further investments. Therefore, at this time, when markets have fallen and sentiment is uncertain, we would suggest the wisest thing to do would be to review your asset allocation to determine how much of your investable assets you wish to have in growth assets and then this will guide the answer as to whether you should be investing further. Whilst this may result in you being incorrect in the short-term, if markets continue to fall, this strategy will likely smooth out your returns over a longer period.

This may mean that you are re-allocating assets which have previously fallen into the defensive category across into growth assets to ensure your portfolio remains aligned with your investment risk tolerance. The opposite also occurs in rising markets, which is why we are open to taking profits on growth securities on strength.

Famous investor, Warren Buffett, has been quoted in the past as saying, “only when the tide goes out do you discover who’s been swimming naked”. This quote also has great importance in current markets, whereby you should stress test your portfolio by looking at the securities you hold and considering whether you would continue being comfortable with your holdings if the market were to fall further.

Falling markets aren’t comfortable for investors or advisers alike, however we know volatility is required as this is what will allow stronger returns to be generated over the long-term. While there may be further weakness in the short-to-medium term as we see a multitude of factors play out, we continue to believe investment markets offer great opportunity over the long-term if managed correctly in conjunction with an investor’s tolerance for risk.

More Information

If you would like help reviewing your investments or would simply like to discuss the current market, please feel free to contact the Morgans Toowoomba office on (07) 4639 1277.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.