Recent geopolitical events have caused market turmoil in recent months. But volatility is part of investing, even if “it feels different this time”. We help investors take a long-term perspective and suggest steps to consider now.
The turmoil in the Middle East and beyond and its knock-on effects on global economies have caused painful volatility across markets worldwide over recent weeks. For investors watching their portfolios and wondering what to do for the best, it makes a worrying geopolitical scenario all the more concerning.
But the fact is that periods of disruption are baked into real life and are an integral part of market ups and downs. This century alone, we’ve watched a string of market-shaking events unfold, from the US 9/11 terrorist attacks to the global financial crisis and Covid pandemic.
What should investors bear in mind during such periods, then, and what steps could they take to help weather turbulence that somehow always feel ‘different this time’?
Keep calm and carry on
Perhaps the most important takeaway should be that for well-diversified investors it generally pays to sit tight and do very little, resisting the temptation to look too often at your portfolio’s fluctuations and focusing instead on the long-term growth that has historically been delivered by equity markets.
That’s because markets are notoriously difficult to time, especially in periods of heightened volatility: there is no reliable indicator that will flag up the ideal opportunity either to cash in your holdings or to buy back into them. The big danger of going into cash when the going gets rocky is therefore that you run the very real risk of missing some or all of the subsequent recovery, which can be an equally dramatic affair with single days of significant gains.
It’s also instructive to consider what the choice of sticking with equities rather than retreating to cash through volatility can mean in reality.
Recent JP Morgan Asset Management research looked at the fallout from the biggest shocks to upset the US market over the past 35 years, focusing on the one-year return in excess of cash that a typical portfolio (split 60/40 between equities and bonds) delivered in each case.
The research identified 11 major geopolitical events with global ramifications over that time, including wars, economic and political crises, terrorist acts and the pandemic.
On a one-year basis, the 60/40 portfolio was still down compared with shortly before the event on three out of the 11 occasions; but taking an overall average, it returned around 8%1 above cash. Over three years, the portfolio showed gains in excess of cash in every instance, with an average return more than 20%1 above cash.
The bottom line is that equity investment should be treated as a long-term commitment. Markets are not good at measured responses to disruptive events: they tend to react dramatically in the short term, with companies’ share prices rapidly and indiscriminately hard-hit by uncertainty.
But the fundamentals of those companies will not have altered much, even if their valuations have tanked. They still have the same capacity for long-term earnings growth and innovation, the same market strength and high-quality management teams; and over time those attributes tend to be reflected in their price.
The management teams that oversee successful stock-picking investment trusts have developed robust systems to hunt out high-quality businesses that can be bought at sensible prices. Indeed, for them market volatility can open up a wealth of opportunities to pick up attractive stocks at equally attractive valuations.
Strategies to ease short-term pain
One way for long-term investors to take the sting out of market fluctuations is through regular savings plans. Apart from being a hassle-free and cost-effective way of investing, these plans can help to smooth the impact of market ups and downs.
That’s because by investing a fixed amount into nominated funds or trusts each month, investors benefit from a phenomenon known as pound-cost averaging: when the market is falling, the monthly contribution buys more units or shares than when it is buoyant (and vice versa when the market is rising). In volatile times, regular investors can end up with more shares than if they had made a one-off investment with the same amount of money.
The assurance of a regular income stream, even when capital growth is elusive, is a further comfort. Indeed, in recent decades, the increasing focus on year-on-year dividend growth as a foundation for income-seekers and a reliable bedrock for investors’ long-term total returns has led to the creation of the Association of Investment Companies’ (AIC) Dividend Heroes.2
The longest-running Dividend Hero investment trusts have chalked up well over 50 years of consecutive dividend increases, providing stability even when share prices are worrisome.
Experience counts for much
Moreover, the investment trust industry boasts a wealth of fund managers who can draw upon decades of invaluable experience when navigating unpredictable geopolitical events.
“These managers have seen everything from oil crises and rampant inflation to armed conflicts and market volatility. This experience helps them see beyond the alarming daily events and keep a calm head in uncertain times,” observes the AIC’s Annabel Brodie-Smith.
One such is Georgina Brittain, co-manager of JPMorgan UK Small Cap Growth & Income Trust. “Over the course of my career I’ve managed through multiple periods of uncertainty, and the most important lesson has been to stay calm and keep things in perspective. When markets start moving sharply, it’s often driven by fear, and reacting in that moment can do more harm than good,” she stresses.
“Instead, it’s better to focus on whether the companies you’ve invested in are still strong and likely to perform well over time. Markets do adjust, and well-run, resilient businesses tend to come through difficult periods better than most. These moments can also create opportunities, allowing us to build positions in high-quality companies at attractive valuations.”
Meanwhile Austin Forey, co-manager of JPMorgan Emerging Markets Growth & Income, emphasises the importance of management teams sticking to their knitting at such times.
“Periods of uncertainty tend to reinforce, rather than change, our core principles of investing. For example, diversification remains essential as different markets and companies respond in different ways to geopolitical stress,” he says.
“Similarly, risk is always present. As we do not have any special insight into predicting geopolitical outcomes, our focus must remain on understanding how these risks feed through to businesses and returns rather than trying to forecast events.”
Of course, some parts of the world are likely to be more directly impacted than others, prompting managers to take more specific action in particular countries or sectors.
But as Omar Negyal, manager of JPMorgan Emerging Markets Dividend Income, points out, it’s still all about discipline. “The approach is to follow the process and keep rotating positions. The team is focused on maintaining flexibility in country and sector weighting,” he stresses.
In the end, successful investing for the long term is rooted in a few basic principles: diversify across markets; buy at sensible prices; avoid panic-selling when turbulence hits; and hold onto that long view. This crisis too shall pass, one way or another.