This article has been written by an expert contributor, Kerry Craig, Global Market Strategist, J.P. Morgan Asset Management. Links in the article have been added by Equity Mates Media.
How can I navigate market uncertainty?
Markets will always have an element of being unpredictable and suffer through down periods. But these do not typically last for long.
Over the last decade in any given year there has been an event or reason not to invest. Fears over recession or slowing growth, the impact of rising interest rates, geopolitics in the form of trade tensions, armed conflict or the European debt crisis, as well as natural disasters have all impacted the investment landscape.
Despite all this a well-diversified portfolio has continued to deliver. In fact, over the last 15 years a portfolio of stocks, bonds and cash in Australian dollars has returned close to 6%, double the return of holding just cash over the same period (See Exhibit 1)1
The markets may get worse, should I sell and hold cash?
Not often in life is doing nothing the best choice, but sometimes in investing it’s the right one. This is tough to do because while gains feel good, losses hurt more. But the risk is that an emotional response to a market drop leads to unnecessary selling when history shows us that markets will recover over time.
When markets are falling, or are volatile, investors can consider the following options to ensure that emotions don’t take over.
- Stay invested, consistent investing in the market means that you’ll invest when prices are both high and low, but the average experience will be much smoother.
- Take a break from checking the price. We don’t check to see if the price of our house or car has gone up or down every day and this is the same principal to follow with your portfolio. This will help keep emotion out of the investment decision making process, and a short-term reaction from undoing long-term work.
- Stay diversified. Diversification is there to cushion the blow, ensure that you’re rebalancing your portfolio to prevent any large overweight’s or concentration in just a few securities
- Don’t forget about income. Even if the value of your holdings may be declining in the short term you are likely to still be earning income from dividends and distributions. These can be re-invested at a lower price, helping your portfolio returns benefit even more when they do recover.
How does investing help with my cash flow management?
Holding lots of cash means easy access to your money, but as with most things in life there is a trade-off. The trade-off of holding cash could be missing out on the opportunity to growth your wealth or use your investment to generate income.
How much cash you hold is a little like petrol in the tank of your car. There are people who will happily drive about with the fuel light on, while others may feel the need to keep topping up the tank for the added security. There will be times in your investment journey when you’d like a little more gas in the tank and others when you can let it run down. What is important is that the car keeps running, and the tank doesn’t need to be full to do that. Hold too much cash and you may be missing out on growth and income from your portfolio.
Investing can also help provide income that is not found by holding cash, for example, income streams from dividends in equity markets or coupons from bonds. Having these sources of income may mean that withdrawals from savings can be reduced. In addition, if these cash flows exceed the level of spending (surplus cash, the difference can be reinvested to build up larger income streams for the future.
Key factors for consideration?
Cash was king when interest rates where high and inflation low. We believe that’s not today’s market landscape and holding just cash over the last decade could potentially result in negative real returns.
- Assess how much cash you really need to create a safety net for your lifestyle. This is often calculated using a multiple of monthly living expenses and is often less than what many people may think.
- Ensuring a well-diversified portfolio can increase returns well over cash as well as limiting the downside risks.
For more from the author, Kerry Craig, check out our episode with Kerry on the Equity Mates Investing Podcast on 21/07/22. Expert: Kerry Craig – J.P. Morgan Asset Management – State of global markets and what it means for investors
Part 1 of this series is available here: Investment questions for all stages of investing: Part 1 – ‘The Newbie’
Part 3 of this series is available here: Investment questions for all stages of investing: Part 3 – ‘The Go-Getter’
Kerry is responsible for communicating the latest market and economic views from J.P. Morgan Asset Management’s Global Market Insights Strategy Team. With more than 10 years’ experience, Kerry provides valuable insights and perspectives on the economy and markets to investors. As a frequent commentator on Bloomberg, CNBC, the AFR and the wider financial press, Kerry is able to explain complex economic and market issues in a language that investors understand.
Sources:
1: Bloomberg Finance L.P., FactSet, FTSE, J.P. Morgan, MSCI, Standard & Poor’s, J.P. Morgan Asset Management. Annualised return (Ann.) and volatility (Vol.) covers the period 2004 to 2018. EM equity: MSCI Emerging Markets; Australian FI: Bloomberg AusBond Composite (0+Y); Global FI: Barclays Global Aggregate; DM equity: MSCI World; Aus. equity: ASX 200 Index; REITs: FTSE EPRA/NAREIT Australia; Cash: Bloomberg AusBond Bank Bill Index.