Time to change your investment strategy?

As investors seemed to have regained their footing after the disruptions due to the pandemic, the conflict in Ukraine and mounting sanctions from the U.S. and Europe have unsettled the stock market again. But the world rarely goes back to “normal”, as historically we seem to lurch from one crisis to another.

Markets are now 10-15% down, which is close to the average 15% intra-year decline in the S&P 500 (a measure of the 500 largest shares in the USA). 

Therefore, the current situation is not out of the ordinary. To put things in context, every 5 to 8 years we see a decline of 20% – a so-called bear market.

These temporary declines may continue for a short time or a long time. No one knows. Markets may keep falling, but eventually the temporary decline will give way to their inevitable advance.

Impacts from geopolitical crises are short-lived

When shares ‌decline, investors often make knee-jerk decisions and sell. Cutting the losses and waiting for better times seems the right thing to do, but financial analyses into past crises tell us a different story.

Vanguard analysts examined the market's reaction to 22 geopolitical events over the past 60 years, such as the Cuban missile crisis, the Iraq war and the 2014 Ukraine conflict.

^{Image credit: The lion of Egyptian revolution (Qasr al-Nil Bridge) by Kodak Agfa. Source: “Geopolitical sell-offs are typically short-lived” – Vanguard.}

The picture emerging from the above chart is clear.

Markets typically react negatively to geopolitical events, but sell-offs in response to these events tend to be short-lived.

Returns over the following 12-month period are largely in line with long-term average returns: 5% average after 6 months and 9% average after 12 months.

As Peter Lynch, manager of the Fidelity Magellan Fund between 1977 and 1990, said:

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

Should I sell or should I… buy?

The answer seems easy: think long-term and hold tight. But what about those who recommend buying stock when markets are low? Is that a good reason to steer your portfolio towards new shores? Perhaps. And this is why keeping some liquid cash handy to top up your investments is a good idea.

Experience has taught us that the most reliable investment is a broadly diversified portfolio and that timing the market is notoriously difficult. However, we're not saying that investment strategies are set in stone and you should never change them.

At Life Sherpa we recommend starting with SMARTER goals which are grounded in your personal values to understand if and when to invest. Once you know it’s the right time for you to invest, you need to figure out how.

Life is dynamic and ever-evolving. As you progress through its different stages, your financial circumstances will change. Your strategy should be synced to these shifts, not the market ups and downs.

When it’s Time to Change Your Investment Strategy

To understand if you should re-evaluate your strategy, consider if any of the following has changed:

1. Your financial situation

Significant life changes, including getting a new job or a pay rise, becoming a parent, getting married or divorcing, require you to revisit your investment portfolio to adjust to your new life goals. Bring taxes into the mix, as some of these shifts mean you might fall under a different income bracket. And don’t forget negative gearing, which sometimes explains why a “bad” short-term investment makes financial sense in the long run.

2. Your risk tolerance

In general, the shorter your investment horizon (i.e. the sooner you need the money), the lower risk you should accept for your investments. If your time horizon is less than two years, income-generating investments, such as saving accounts with high interest, might be a consideration. If you have a time horizon of 2 to 10 years, a mix of stocks and more conservative investments, such as bonds, may be best; and if you’re looking at 10 to 20 years, relatively higher risk investments that offer greater returns, such as stocks, could be a good option.

3. Your portfolio performance

Are your investments underperforming or outperforming? The key here is to look for significant changes and trends. Considering what we’ve seen in the first part of this article, a bad day, week or month is not always terrible news.

However, having a good idea of how the broader context is impacting your investments is ideal, so you can find out if the change is temporary and you should stay put, or look at changing your plans.

An important thing to remember is that you should measure your investment performance against your goals. Your timeframe, risk appetite and the nature of your objectives have influenced the choice of the right portfolio for you. 

Therefore, assessing your superfund or balanced portfolio against the ASX200,  for example, would be like comparing apples and macadamias (i.e. very different kinds of investments) without considering your specific situation.

4. The legislation or the market conditions

Investments are impacted not just by wars and other crises. Government inquiries (such as Royal Commissions) and new legislation might force funds to change their structure, composition and size. Demands from the market might push financial providers to revise their products or introduce new ones, such as the ones geared towards eco or ethically conscious investors. 

Some changes can go in your favour, others not so much. Navigating the complexity of these products can be challenging, and the help of a trusted financial advisor is invaluable in these circumstances.

Bottom line: a long-term perspective pays off

If your investing horizon is long, focus on life goals and keep calm when the share prices swing up and down. The stock market has historically always bounced back, so if you hold tight and stay invested, you'll be rewarded.

Alan Abelson, a veteran financial journalist at Barron’s magazine,  believed that

investing for the long run, but listening to market news every day is like a man walking up a big hill with a yo-yo and keeping his eyes fixed on the yo-yo instead of the hill.

However, stock market volatility is a good reminder that having a solid emergency stash is an important part of your strategy. That way, you know you can access money at any time, even if your investments are going down in value.