Over the past 50 years, investors had not experienced as much uncertainty as they do today when political and economic turmoil prevails. The most significant risk small investors face is panic attacks, leading them to jump out of the frying pan and into the fire.
The attack on the Twin Towers in the US in 2001 and financial crisis of 2008 were the more recent shocks that spooked financial markets. However, markets soon recovered. Those who held their nerves for long enough were spared the agony of seeing their wealth melt in the first few months of these crises.
Investors have different risk appetites and, perhaps more importantly, different risk tolerance. Many will watch their pension pot statements to see how their future income may be affected by the present market turmoil. One advice that small investors should follow is to discuss with their adviser how to manage the current uncertainty to avoid the worst possible outcome.
No one knows what the outcome of the Ukraine war will be, much less how financial markets will react. Some analysts are forecasting that normality will return soon, as happened in previous market turmoil. Others are more cautious and believe that the combined consequences of COVID and the Ukraine war will affect global economies more profoundly and for much longer.
During times of turmoil, there will always be analysts who will argue that “it’s different this time”. This could be partially true. The combination of high political risk and weaknesses in economic fundamentals may indeed be a unique blend not experienced before. Still, markets will remain driven by buyers, holders and sellers.
Some investors with an aggressive risk appetite will undoubtedly see opportunities to buy stocks that look exceptionally cheap. In the last several months, these investors may have been waiting for a market correction, defined as a fall of 20 per cent in stock prices. For too long the rapid appreciation of stock prices was beginning to become worrying.
Adventurous investors may now want to take a risk and buy shares or bonds that may look attractively priced. An important consideration for such investors is that if markets turn against them, they will still afford to lose some of their wealth without affecting their lifestyle.
Some investors with an aggressive risk appetite will undoubtedly see opportunities to buy stocks that look exceptionally cheap
All of us are older than we were the last time financial markets were in turmoil. Our financial objectives may have changed. For instance, retired persons who depend on their investment income to support their lifestyle may give more importance to liquidity than long-term growth prospects. Some analysts would advise such investors to hold on to their investments while ensuring that they do not need to liquidate part of their capital for the next five years.
The most difficult options are those available to investors who need to sell to meet urgent expenses. Those with a diversified portfolio could dispose of the short-term exposures to meet their financial needs while leaving the longer-term accounts to stay fully invested.
In all cases, small investors must never lose sight of their long-term goals. Emotional decisions made during times of turmoil can pull you away from your long-term goals and derail your plans of financial freedom, wealth creation and peace of mind.
Sometimes, the best advice that any small investor could follow is to do nothing and not react to the news cycles daily. If your past investment strategy was to have a well-structured portfolio, it should be able to withstand whatever comes your way. One thing is sure: managing uncertainty in the present circumstances is a marathon, not a sprint.
We come out of a two-year global pandemic. The silver lining of this event is that there is pent-up consumer demand that may boost economic growth. Of course, the effects of the Ukraine war and the persisting bottlenecks in the supply chain of many commodities are unlikely to see economies growing again at a fast rate.
One certainty that comes out of the present market turmoil is that political risk will be a much more crucial consideration when investors decide how to manage their wealth. Moreover, the risk of high inflation and economic stagnation is today much higher than it was just a few years ago, when many were worrying about deflation.
Investors who fret about the structure of their investments because they did not adopt sound investment strategies in the past will do well to seek advice from financial advisers they trust. Getting a second opinion on all critical decisions is always a good idea.