The global pandemic has caused a massive economic downturn; many people may be pessimistic during this time of uncertainty. It can be argued that it’s now more important than ever to filter out the noise and make positive long-term decisions.
Excessive focus on short-term losses can lead to decisions that are not aligned with long-term goals
During this unpredictable period, it’s understandable that you may be keeping an eye on your investment portfolio more regularly. However, studies show that frequent checking has the potential to raise levels of anxiety as well as impact long-term outcomes. For example, you may make more considered investment decisions during uncertain times to safeguard your investments.
Conversely, scientific studies have shown that it’s possible for our brain to respond to financial losses in the same way as perceiving physical pain. This can explain why investors may make impulsive, investment-altering short-term decisions such as switching which typically leads to locking in losses. It’s in an effort to avoid possible pain in the future. The impact that COVID-19 has had on markets and our investment values can be seen clearly.
Where do we go from here?
It can be argued that it’s impossible to determine when the market will recover in South Africa. It’s generally accepted that we aren’t sure how long the situation will last; continued market volatility should be expected in the coming months. People’s morale and negative sentiment may be abundant at this point in time and it begs the question, what can be done?
Pay attention on ‘investment truths’
The primary determinant of future returns is generally the price you pay relative to the true worth of each asset. The pandemic may have caused assets to drop sharply – it’s been reported that global equity markets may have incurred up to a 30% drop.
However, it can be said that the true worth of a business doesn’t fluctuate crazily on a daily, weekly or a monthly basis, even if the share price does. When taking a look at your equity investments, you can see that you still own the same businesses you owned a few months ago; it’s the prices of the businesses that are typically lower.
Give your investment time
When it comes to investing, time may be your best friend if you don’t let your emotions get the best of you, causing you to make impulsive decisions. It’s recommended that you cut out market noise and look at your investments through a long-term lens.
Concentrate on your long-term goals
Informed investment decisions are commonly based on three factors: risk tolerance, investment horizon and investment goals. It’s best if they never change regardless of market movements.
Should your personal circumstances change, you may need to make investment management changes to align with new goals. In the absence of any change, it’s advised that no actions are taken even when there is market volatility; timing the market can lead to significant losses and disappointment.