We all expected a slightly bumpy year for investments in 2022 as markets recovered from the impact of Covid-19. What we didn’t anticipate was the invasion of Ukraine by Russia and the resulting impact on energy markets, the rapid increase in inflation, and the marked effect on the global economy. These factors all resulted in both equities and bonds ending the year in a negative fashion.
A question we were asked many times during last year was whether an investment should be cashed in to minimise losses. With the negative end to the year for equities and bonds in particular, this concern has been raised again over the past few weeks.
The first point to note is that there had been a positive start to 2023 and markets certainly seem to be on the rebound. Energy prices, inflation and other pressures seem to have started to stabilise. The threat of recession is still with us but, should this happen, all pointers indicate this would be mild and short-lived.
However, the past 2 weeks have shown some significant events in the market which will once again impact conditions in the short-term. The initial reaction to the banking crisis in the US and in Switzerland saw financial conditions tighten. This did appear to make recessionary conditions more likely. However, the swift response by regulators to the emerging crisis conditions has diminished the negative impact. Interest rate expectations did drop back but as I write equities are rebounding.
This situation brings me to my second point. This situation very much demonstrates why investing is a long-term commitment. By their nature markets have ups and downs but over the course of an investment, these tend to level out. There are many factors that can affect the markets. Volatility is usually caused by political and economic factors, industry or sector changes, or even individual company news. While it can be difficult to witness any declines in your portfolio, it is important to apply logic and not act out of emotion.
History has shown that those who have stayed invested during previous periods of market volatility have achieved their original investment objectives. Investing in a diversified equity portfolio has been shown to provide the best return on investment over a long period. The greatest risk to investment return on equities for an investor was not from being in the market during the negative times but being out of it during the more frequent positive ones.
This brings us back to a key message we share with our clients. Once you have chosen a strategy that suits your needs and risk profile, returns may depend on time in the market rather than timing the markets. It is important to not act in haste. While we cannot predict exactly what markets will do, we can certainly draw on past experience. In answer to the question, it is down to what the objective of the investment is and how long the term is. These factors will dictate what action if any needs to be taken.
A well-balanced, diversified portfolio would be built to take into account the ups and downs of the market in achieving its objective. Volatility is a typical part of investing. But it’s not unusual to be concerned by periods of it, especially when this is sustained for a considerable period. If you have any questions or concerns in relation to your own investment, please don’t hesitate to get in touch with us at Quintas Wealth Management.
