Should the current market instability keep you invested?

The current high volatility and instability of the financial market is striking fear into the hearts of many investors. This is causing them to wonder what move they should make next. Does the current market dip mean they should sell? Or should they stay the course, hoping for better days ahead?

What factors have influenced financial markets recently?

Sky-high inflation, the war in Ukraine, supply issues, the COVID-19 crisis in China, central banks’ interest rate hikes, slow economic growth… Right now, it is certainly not a good time on the whole economically-speaking. 2022 has been a difficult year overall so far, and global stocks are suffering.

How quickly does instability happen?

Swift changes in the market are a primary distinguishing mark of volatility in financial markets. This includes commodities, currencies (which now includes cryptocurrencies), government bonds, and other asset classes.

There are many reasons why volatility may occur in the financial market, including global events such as war, natural disasters, and pandemics. So, it is no real surprise that it is happening right now. For example, share prices of certain companies may fall as investors pull their money out of them. This is because they fear that the particular world-disrupting event will have a negative effect on them.

Of course, every single investment you make carries the risk that it may fall in value. When the fall is fast and sharp, as what is happening right now in the cryptocurrency market for instance, it is bound to be a shock for investors. However, it is important that they remain cool and collected, and do not make any sudden and rash decisions.

What are the experts saying?

While clearly a cause for concern, many strategists are saying that the whole situation is not as dire as it may seem at first glance. In fact, they are saying that staying the course may be the wisest decision. Furthermore, research over the years has shown that big market drops actually have a tendency to come before large gains. If your worry provokes you into selling, you could miss out on the future benefits.

According to deVere Group CEO and founder Nigel Green, even in these turbulent times, high-net-worth investors are topping up their financial portfolios at lower entry points. This is because they realise that this will create significant buying opportunities to build their long-term wealth. He says that a good financial advisor will help investors take advantage of the opportunities brought about by volatility, and avoid possible danger and risk.

Should you stay invested despite market instability

Good financial advisors will be recommending that their clients pick up some high-quality stocks that have a solid future at what they see as ‘discounted’ prices.

Nigel Green says that not only are many investors remaining invested… Some of them are not reacting against or being frightened off by short-term fluctuations; even increasing their investments. A good combination of asset classes, sectors, regions, and currencies offers protection from market shocks, he concludes.

Market instability – history repeating itself?

One thing to keep in mind is how the world has reacted to such events in the past.

Throughout history, global financial markets have always recovered from every crisis. Examples include the wars in Afghanistan, the Falklands and Vietnam. This is essentially a pattern. The worst days tend to be followed by the best days.

According to analysis by financial giant J.P. Morgan, the 10 best days over the past 20 years happened after large declines during the 2008 financial crisis or during the early days of COVID-19.

This chart shows the annualised performance of a $10,000 investment made between January 2002 and January 2022. A fully invested investment returned 9.4% or $60,253. When the investor missed the 10 best days, the return is 5.21% or $27,604. When the investor missed the 20 best days, the return is 2.51% or $16,414. Finally, when the investor missed the 30 best days, the return is 0.32% or $10,651. An added fact is that seven of the 10 best days occurred within 15 days of the 10 worst days.

Moreover, recent research looking back all the way to 1930 by Bank of America also found that had investors waited out the S&P 500′s 10 best days per decade, their total returns would be considerably higher than the return for those investors who ended up sitting it out.

Should you stay invested despite current market instability

What should you do next?

Rather than a totally black blot, this time can be seen as an optimal global financial opportunity, which can possibly lead to highly lucrative opportunities. Of course, this does not mean that individual securities will all do well. Some will falter. Some companies will even fold.

This underlines the importance of having a diversified financial portfolio which gives you exposure to multiple asset classes.

Should you want to check out your options at this time, please get in touch with one of our highly experienced financial advisors today.

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