When the stock market is down

When the market is in a down cycle, it's normal to feel anxious about your investments. It is equally normal to feel excited with the potential opportunities. Should you worry about what the market did today? Yesterday? Where is it going? The answer depends on several factors e.g. your age, your investment horizon, proximity to retirement, your tolerance for investment risk and your experience.

Medium to long-term investing and stock market falls

If you are investing for the medium to long-term, you probably don’t have to worry about what the market does on any given day.

One of the keys to investing is defining your risk tolerance beforehand and building a portfolio that you are comfortable with i.e. investing into bonds, shares infrastructure or property for example and how they are proportioned within your investment. This is called asset allocation, and once you have settled on it, you don’t need to worry unless your allocation becomes completely out of sync with your objectives, therefore you should review this on a regular basis ensuring that it is still in line with your plans and within your risk tolerance.

Many financial professionals will tell you that asset allocation alone is by far the largest determining factor driving the performance within any given portfolio and that regular portfolio reviews and potential rebalancing is therefore the best medium to long-term strategy. This approach should also give you greater peace of mind.

Rebalance to address portfolio changes

Instead of randomly following the market, you can set a date once or twice a year to review your investment and see if your portfolio is still in line with your goals. If not, then rebalance. Rebalancing can involve selling your investments that have performed well to put more money into your investments that have performed less well. This can also be described as buying low and selling high.

Imagine you have a portfolio that is 70% in shares and 30% in bonds. If bonds have a great year and shares fall, the balance of your portfolio will change. If bonds then represent, say 37% to 63% for shares, you can move more money to shares to rebalance. If you are following this strategy, you don’t really need to pay too much attention to your investment in the interim period between your reviews. Ups and downs will happen but if your asset allocation is on target, you are in a better position to ride out market fluctuations in an environment that you are happy and comfortable with. Rebalancing can also be used to address any changes in your objectives, strategy and risk tolerance.

How much you want to invest depends on your own objectives, appetite for growth potential and tolerance for investment risk. If you are a medium to long-term investor, you are more able to ride the waves of market and economic downturns rather than fight them because of your asset allocation and investment horizon.

The market is cyclical - it always has been and it always will be. The key to investing is therefore choosing a vehicle for your investment journey that is going to give you the most comfortable ride and if you service your vehicle on a regular basis, it is likely to be more reliable and get you to your desired destination with the least amount of fuss.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.