Staying invested in the market downturn — with the right plan
Endowus Insights

Staying invested in the market downturn — with the right plan

Updated
July 22, 2022
published
June 13, 2022
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bear-bull
  • Amid volatile markets, take heart: building wealth through investing is a matter of time and discipline. 
  • History shows that the best-performing days often follow the worst-performing days; there is no consistent way for an investor to time these swings.
  • Our diversified, low-cost portfolios are generally performing better than the benchmark index and portfolios offered by competitors.
  • Time in the market is better than timing the market.

Markets have been very volatile and it's a tough time to be an investor right now. 

It is important to maintain the right perspective when markets are turbulent. When markets spike up and overshoot, investors shouldn’t chase markets up. Likewise, we should not let the emotional pain cloud our judgement when markets are down and we are losing money. A downturn in markets is not uncommon, and cycles are a natural part of any market or economy. In these difficult times, please take heart: building wealth through investing (and not speculating) is a matter of time and discipline. 

Data shows that investors who stay invested at a risk level suitable for their goals — while remaining diversified, strategic and passive in asset allocation, and at a low cost — stand a much better chance of success than those who try to speculate and time their exposure to markets, geographies, and sectors.

We only have to look back at the most recent Covid-induced market collapse in March 2020, where panicked trading and emotional reactions led to wrong decisions. Investors who maintained their goals and risk levels, and continued their investment journey through a time-tested and evidence-based investment strategy, experienced much better outcomes.

History also shows that the best-performing days often follow the worst-performing days. With no consistent way for an investor to time these swings, the optimal way to capture strong gains and be compensated for the risk you take in global markets is to stick to your sound investment plan. 

Many of our portfolios hold thousands of individual securities, mitigating the idiosyncratic risks associated with investing in individual stocks or bonds. They are generally performing better than the benchmark index and portfolios offered by competitors. While none of us can predict what the markets will do in the short term, we are confident in the long-term resilience of our investment philosophy. We believe in staying invested to let time do the work for you.  

Here are some articles that explain how we should respond to market downturns, and why time in the market is better than timing the market.

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Rational investment strategies to win in a market correction

Time in the markets, NOT timing the market

Meet “The Worst Investor In the World”, who has the worst possible timing — investing right before each crash in each decade starting from 1970. Despite his horrendous market timing, the investor would have still earned an annualised return of 8%, with a total return of more than 1,400%. The key here is really time in the markets, rather than focusing on timing. By trying to time when markets are "bottomed out", we miss out on the best times to invest during those downturns.

So you may have swirling questions that sound like these: “Is now the time to buy?”; “when should I buy the dip?”; “how much further down is the market going to go?” If you have cash on the sidelines, here’s an option: try to buy throughout the dip, rather than trying to catch the bottom of the dip.

Read on to find out why you do not have to be a superhero to do well.

Lessons from past bear markets

Bear market

"At the extreme moments of fear and greed, the power of the daily price momentum and the mood and passions of ‘the crowd’ are tremendously important psychological influences on you. It takes a strong, self confident, emotionally mature person to stand firm against disdain, mockery, and repudiation when the market itself seems to be absolutely confirming that you are both mad and wrong. Also, be obsessive in making sure your facts are right and that you haven't missed or misunderstood something." 

Those are the words of Barton Biggs, the famed strategist who started Morgan Stanley's asset management business in the US back in 1975. Take a trip through history to learn how the past underlines the basics: as long-term investors, where will we be one year, three years, and five years from now?

How we should invest amid high inflation

The Fed

Things have become more expensive. We call it inflation. But that also includes the cost of money — reflecting in interest rates — which has followed inflation higher. 

Many are predicting a new era of higher-for-longer inflation, with the Covid-induced cost push inflation exacerbated by the Russia-Ukraine war — the crisis compounded the price shock by pushing up oil, food, and metal prices. China’s lockdown policy has added strain to supply-chain disruptions. We’re in a perfect storm. 

While inflation hurts our pockets, that’s not the only impact to our finances that we should consider. Inflation has a clear impact on our real investment returns — an investment that returns 2% before inflation in an environment of 3% inflation would mean a negative return (-1%) when adjusted for inflation. So far this year, we have also seen an unprecedented fall in both equities and bond prices, damaging our savings and wealth portfolios. Read on to learn more about what investors should do to adjust to rising inflation

Which came first: the chicken, the egg, or retirement planning?

The chicken, the egg, or retirement planning

As we bemoan the possible short supply of our beloved chicken rice soon, we recall how chickens can help guide us on our investing journey towards peace of mind at retirement. In life, you have two "chickens". First, meet the "Work Chicken" — this is you  — your work, creativity and labour are translated into the money you make from your efforts. We call this "human capital". Then you have your "Wealth Chicken" — the money you accumulate, save, inherit (if Lady Luck smiles upon you), and invest. We can call this financial capital. The number of eggs it produces is relative to the size of the chicken (amount of capital accumulated) and the quality of the food you feed it (how you invest it).

Both of these chickens produce eggs (money) at varying speeds throughout life and should cross paths at some point. But don’t count your chickens before they hatch just yet. Investing only until retirement is the equivalent of killing your chickens and only being left with eggs. Learn why ending your investing prematurely can hurt your retirement plans, no matter your assumed withdrawal rate. Start now and stay disciplined, lest the chickens come home to roost.

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Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

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