Global markets are currently providing investors with a rough ride as the focus turns to China’s economic outlook. While falling markets can be worrying, maintaining a longer-term perspective makes the volatility easier to handle.
A typical response to unsettling markets is an emotional one. We quit risky assets when prices are down and wait for more “certainty”.
These timing strategies can take a few forms. One is to use forecasting to get out when the market is judged as “over-bought” and then to buy back in when the signals say it is “over-sold”.
Alternatively, you might undertake a comprehensive macro-economic analysis of the Chinese economy, its monetary policy, global trade and investment linkages and how the various scenarios around these issues might play out in global markets.
There is very little evidence that these forecast-based timing decisions work with any consistency. Even if people are lucky on their way out of the market at the right time, they still have to decide when to get back in. You can be the world’s best economist and make an accurate assessment of the growth trajectory of China, together with the policy response. But that still doesn’t mean the markets will react as you assume.
Another way is to reflect on how markets price risk. Over the long term, we know there is a return on capital. But those returns are rarely delivered evenly. Sometimes, the markets will fall precipitously and other times they rise inexorably. The only way of getting that “average” return is to remain invested.
Financial products are frequently advertised as offering “average” returns of, say, 8%, but individual year returns can be many multiples of that in either direction. There is nothing wrong with that sort of volatility, if the individual can stomach it. Others can feel uncomfortable and that’s OK too. The important point is being prepared about possible outcomes from your investment choices.
Markets rarely move in one direction for long. If they did, there would be little risk in investing and in the absence of risk, there would be no return.
In the short-term, the greatest contribution you can make to your long-term wealth is exercising patience.