27 Aug 2018
The world is always filled with various risks that may or may not impact investment markets. That’s part and parcel of trying to achieve a higher return for your investments than cash in the bank.
These risks can largely result in 3 outcomes for your investments:
- Permanent loss of capital
- Temporary loss of capital
- Opportunity
The decisions investors make pre, during, and post these risks playing out are all equally important.
Obviously we want to try and minimize the 1st outcome as much as we possibly can, especially when investors are in drawdown mode. Here it’s about avoidance and very careful selection.
The magnitude of the 2nd outcome is largely a function of the risk each investor is willing to take with their investments. Importantly, temporary losses become permanent losses when investors panic and make rash changes to their investments. Temporary losses should be seen as an opportune time to review investments, but not necessarily to act.
The 3rd outcome also depends on the investor’s risk appetite, but more importantly, depends on how the opportunity presents itself. Outside of recessionary periods and deep financial crises, market falls that generally occur are specific to a single asset class, sector, or region. If the fundamentals remain sound, then it may be appropriate take advantage of the opportunity to invest in something more cheaply than it was previously. This, along with time in the market (remaining invested), is how capital growth is achieved.
Right now, the world faces plenty of risks. Some will impact markets whilst others won’t. The ones we are currently paying close attention to are:
- US central bank policy
- Trade wars
- Chinese growth
- Brexit and broader EU integration
- US foreign policy (Russia, Iran, Turkey, Syria)
Each presents its own very different issues, some of which will impact markets directly or indirectly, or both. The news headlines on each drive emotion and sentiment in the very short term, which should largely be ignored as noise. The deeper issues can only be discovered and understood by sorting through the noise and digging deeper. This takes a more rational and logical way of thinking.
Key for investors is not to react to the noise, and to seek assistance from their financial adviser if concerned.
- Chris Lioutas
CIO, PSK Financial Services
