Money Talks: navigating market volatility and fear

26 January 2022
By Victoria Harris

When market volatility and fear cause you to second-guess your careful investments, it’s important to stay the course and have confidence in yourself, says Victoria Harris.

Timing the market sounds easy. Just like investing at the right time sounds like a great idea. However, if you’ve ever tried it, you probably know that in actual fact, it’s exceedingly difficult, if not impossible, to do. There are too many different market drivers and too many assets to choose from, plus they’re both constantly in motion. Despite the experts struggling, there might be a way to tailor your investing approach—one that keeps you open to most opportunities across the broader market while helping you mitigate the natural ups and downs.

Markets move in cycles. Cycles can occur in the short term, with market rallies and corrections, and in the longer term, with full-blown bull markets (where prices are rising or expected to rise) and bear markets (where prices are falling or expected to fall). Typical investor sentiment associated with market cycles ranges from ‘optimism’ as it rises, ‘euphoria’ as it peaks, ‘fear’ as it corrects and then ‘desperation’ at the bottom.

In 2020, global markets experienced an extreme but short-term bear market as the Covid-19 pandemic took hold in March. This was immediately followed by a strong, rapid recovery (bull market), with the NZX 50 finishing the year at levels well above where it began in January.

Investing in the markets can feel like a roller-coaster ride, especially if you pay attention to all the ups and downs that can happen, across several days, or throughout several weeks, months, and years. But if you’re investing for the long term, why do you concern yourself with short-term market fluctuations?

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Because investors often fear market volatility. Volatility represents risk and uncertainty, which nobody enjoys. This leads to many investors attempting to “time” the market by pulling out of their investments when the markets fall and getting in when markets rise. But this can be a big mistake.

Research shows that trying to time the markets can be very costly. Investors may end up selling when their investments are down, crystallising their losses and/or buying when they’ve already missed a significant portion of the recovery.

When you track your investments too closely—rather than taking a long-term view, you can become reactive to market movements and could end up making irrational decisions.

It’s important your investments match your individual needs and goals. Rather than trying to time markets and dodge volatility, it could be more prudent to diversify your portfolio, ensure you don’t have all your eggs in one basket, and cast a wider net for potential investment opportunities. Applying diversification principles to your portfolio reduces over-concentrated exposures and may help you avoid the risk of potentially losing all your hard-earned savings. Diversifying isn’t only about minimising losses either, it can also increase your exposure to potential market opportunities and hence, portfolio gains.

So when market volatility and fear cause you to second-guess your careful investment decisions—have confidence in yourself. If you have the discipline to stay the course, this can be critical to the success of your investing journey and generating wealth.

Victoria Harris is the founder of The Curve — an investing platform for women.

Read more Money Talks: here are Harris’ top 12 investing tips for gifting yourself the gift that keeps on giving

Disclaimer: This article is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice.

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