A tough finish to the year on markets

After 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 which comes with markets. Too often, we all become worried about markets falling 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. 

Previously we have discussed the importance of asset allocation in these articles, that is having the correct split between growth and defensive assets within your portfolio, and this is what should ultimately guide your decision around further investment. Therefore, at this time 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. While this may result in you being incorrect in the short-term, 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. 

The 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, 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 macro 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.