Don't panic! Calm amid the storm

PUBLISHED : Monday, 19 September, 2011, 12:00am
UPDATED : Monday, 19 September, 2011, 12:00am


The seemingly never-ending string of crises and unpredictable events, such as the Arab Spring, financial worries in the euro zone and the downgrading of US debt have left global markets in a constant state of flux, seesawing up and down weekly and often daily.

August was a particularly rocky month, with losses and fear-driven sell-offs erasing nearly all gains from earlier in the year. Since Standard & Poor's (S&P) lowered the US' long-term debt rating from AAA to AA+ on August 5, global markets have been remarkably volatile and have frustrated attempts to predict short-term market behaviour. According to Johnson Cheung, a portfolio manager at Galaxy Asset Management (HK), 'In times of volatility, it's very hard to tell if the market will go up or down on a day-to-day basis.'

However, topsy turvy and unpredictable doesn't mean your investment strategy needs to follow suit. Here we present seven tips and strategies for retail (non-professional) investors to maintain portfolio sanity and a positive growth trajectory through the market chaos.

1. Reassess and reevaluate your investment goals

Given recent fluctuations in global markets, many analysts believe investors should step back and reassess their investment goals. 'I think the investment environment is quite different from the past 30 years. If you don't change your mindset or investment strategy, you could lose a lot right now,' says Li K.F. Samson, chief analyst at Centaline Wealth Management. Whether your aim is saving for retirement, building equity, or growing your rainy-day fund, the volatile market may mean a change of plan. 'You have to invest according to the assumption that the whole world is entering a super-inflation period,' says Li, who thinks monthly inflation in Hong Kong may hit double digits. He suggests retail investors stay focused on long-term goals, while re-evaluating their blue-chip stocks.

2. Maintain a diverse and balanced portfolio

So, you've reassessed your investment goals, now re-examine your portfolio. No matter what your ultimate investment goals, the cardinal rule remains true: don't put all of your eggs in one basket. Make sure your portfolio has a mix of low and high-yield items, with varying degrees of risk. For example, Li suggests every investor include precious metals as a core holding, to hedge against currency debasement. Diversifying your portfolio may lower your returns, but in an ailing market, it can lower your losses too. Every investment carries risk, though, and even a diverse portfolio cannot prevent all losses in a declining market, nor will it ensure profit in a bull market.

3. Identify undervalued assets while the timing is right

Just because global markets are behaving erratically, it doesn't mean you should eschew old investment rules. If a company is well-managed, has good balance sheets and an adaptive strategy, it might make an excellent addition to your portfolio. Amidst all the volatility and fear in the markets, corporate profits are still healthy, and profit margins in many sectors are at all-time highs. Yet despite the relative health of the corporate sector, there are still bargain stocks on offer, with prices that analysts believe are ripe for the taking. 'The companies we invest in usually have a very strong balance sheet,' notes Kathy Xu, assistant asset manager at Aberdeen Asset Management. 'We think valuations now are reasonable and attractive.'

4. Focus on long-term growth items

Few retail investors have the time, wealth, energy or knowledge to devote themselves full-time to their portfolios. Finding time to respond to day-to-day market fluctuations can be impossible. Instead, most private investors take a 10- to 30-year outlook, so why should you worry about this quarter's, or even this year's results? One of the most reliable ways to grow your wealth is simply to invest for the long-term. Go for steady growth items and don't let daily market disturbances send you running.

5. Ignore the hype

The number of voices lining up to give you investment advice has reached an all-time high. Unfortunately, not all of the advice is sound, and consensus and buzz don't necessarily equal a profitable portfolio. The 24-hour news cycle has amplified the voices of those tipsters into a din of overstatements and inflated egos.

Current fixations include: commodities (especially gold which, depending on who is talking, is either a safe haven or the coming of the apocalypse in shiny form), and the possibility of a second-round recession.

No matter what the advice, investors should ignore the hype and do their own research before trading. Aberdeen's strategy is to make sure to fully understand a company and any earnings volatility, rather than reacting to rumours and panic selling, says Xu.

6. Utilise Twitter and other social media for investment ideas and stay abreast of the latest market behaviour

Retail investors can use Twitter and social networks to follow trends in global markets and get real-time guidance from professional investors. Twitter is particularly good, because it can be used as a personalised news ticker for topics and resources relevant to you. Simply 'follow' trusted sources, and voil? you have an instant, bespoke crawl of news and advice.

You can also search for a general topic, 'gold prices' for example, for a web-wide snapshot of news. Thanks to its uncensored user base, stories often break on Twitter before major news networks pick them up, very useful during times of market volatility.

However, as with tip number 5, avoid being over-connected and falling prey to market hype. Use Twitter and social networks as a research starting point, rather than as a library of investment knowledge.

7. Relax!

Panicking is the worst reaction in a market downturn. Think about it this way: 100 per cent of the doomsday predictions of the world's end have so far been wrong.

Emotional investment is your worst enemy, often translating into irrational behaviour, such as buying high and selling low. Reasoned investment decisions are nearly impossible if you are acting out of fear or exuberance. Letting shaky market sentiment scare you into selling or frighten you away from investing in the first place can be a huge mistake.

For evidence of this, remember autumn of 2008, when global markets plummeted and there was an exodus from investments. Markets eventually rebounded, and those who ploughed in the darkest days have turned incredible profits.

So, if you do nothing else in today's volatile markets, take a deep breath and relax. There is a 100 per cent chance the world will not end.