Fight or Flight? – Coping with Market Turmoil

These are extraordinary times, and we are witnessing events on a daily basis that we have not seen before. At such times, markets, the media, and consequently, all of us can find ourselves drawn into a self-perpetuating and self-fulfilling tailspin of panic, fear and uncertainty.

At these times, it can be hard to know what our response should be. On the one hand, clients might expect us to interpret these events and respond, possibly recommending actions or changes. On the other hand, short term, knee jerk reactions are not what’s needed, and are more likely to become part of the self-fulfilling nature of these events rather than adding any long term value.

At times of uncertainty and doubt, I often find Rudyard Kipling’s words helpful to remember and to ponder on:

If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you
But make allowance for their doubting too

We are not called Paradigm for nothing. Our role is to bring a different perspective to our clients’ lives and to their financial circumstances. As they are bombarded by fear, doom and gloom through the media, our job is to bring a different perspective – a different paradigm.

Financial and market circumstances are temporary. Financial planning and investment principles are timeless, and will stand the test of time long after this banking crisis has been consigned to the economics textbooks.

To refine gold, you have to turn up the heat to burn off the rubbish and allow the stuff of value to emerge. We need periods like this, from time to time, to test our principles, expose and burn off what is rubbish, and leave behind a refined product.

The key principles on which our investment management approach is based have stood the test of time and survived several business cycles, it’s helpful to remember them and stick to them at times like this:

  1. We cannot time markets. We only know what’s happened, not what will happen next. We cannot and must not, therefore, try to advise clients based on what we think might happen next.
  2. Diversification is key. Not all assets rise and fall together and to the same extent. The FTSE All Share fell by 13% in September, the FTSE World by 10%, but Global Property only fell 5%, Gilts were level, Global bonds were up by 1% and Cash up by 0.5%.
  3. The biggest one day gains on markets have always followed periods of rapid decline. Missing those rebounds can dramatically reduce the long term and annualised returns of a portfolio forever.
  4. Bailing out after a market collapse is a classic investor error, which has been repeated over and over again since the Great Depression. It is then usually compounded by moving into safe assets that have become very expensive, such as government bonds in the flight to safety. When things recover the safe assets often fall in value, creating a double whammy.
  5. For net savers, the price of investments which they want to buy has just fallen significantly. This is great news for them, and they should gladly buy the investments they want before the price goes up again. Imagine if Tesco reduced the price of every product in its stores by 33%!
  6. Markets are forward looking. We are very probably entering into a global recession but markets are pricing in the expectation of this already. History shows that markets often rise in recessions as the bad news is factored in and the markets are looking ahead to recovery.
  7. A paper loss is not a real loss until you sell: if clients don’t need their money, they should leave it alone, and unplug the telly!

I hope this helps: it’s a time for keeping our heads when others are losing theirs; trusting ourselves at a time of doubt and uncertainty, and sticking to our principles which have survived these events before, and will still be there after this crisis is over.

That’s our paradigm!

William Pratt
Chief Operating Officer