Market turbulence - what should I do?

Market turbulence - what should I do?

The media is in a frenzy, again. You think the end of the world is nigh - or at least the total collapse of the stock market.

True, the S&P 500 index has fallen more than 15% in the fourth quarter of 2018. Since 1926 (over 92 years) there have been 370 quarterly results issued for the S&P 500 and historically speaking this result would be the 15th worst quarterly result in this series.

So, shall we sell everything now and sit back until the markets are up again? Should we buy the dip and invest at a discount? None of the above - at least not without first checking your own financial plan and profile. If the logic of your portfolio allocation is still valid and your long-term goals remain unchanged, you will need to choose an action or repositioning that is the best fit with your plan. Is the expected performance over time in line with the risk-level that you can handle (emotionally or financially)?

Warren Buffet reminds us that emotional reactions seldom harvest good results. Take a step back and observe the events with cool rationality. Then take a breath and let today’s madness pass you by. "Turn off the TV" could well be the best investment advice this man ever gave. Other successful investors also shared their insight. Howard Marks points out that this “Bust” is no more than the result of the “Boom” that came before it. The increase in the markets (especially in the US) went too fast, and was mainly due to the tax reduction of the Trump administration rather than on fundamental data. This correction is therefore, not exaggerated but brings stock prices back in line with the underlying valuations. Further corrections are still possible, because other support measures (such as Quantitative Easing) have also pushed the prices above their “natural” levels, and consequently markets may fall back even more as these measures are phased out.

Joel Greenblatt (professor, hedge fund manager and author) teaches us that the price of a share can fluctuate considerably, but that the value of a company is actually relatively stable. Benjamin Graham also describes “Mister Market” as a crazy person that sometimes sells amazing companies at half their value, and other times worthless companies at inflated prices. Historically, corrections of more than 10% occur annually and on average more than once in a year. Actual bear markets happen every three and a-half years on average, and yet, portfolios have grown over time. Of course, to profit from the markets, one must be an investor in them even when one fears the short-term losses. That is difficult, says Daniel Crosby (The Behavioral Investor) because biologically, it is just not how we are built, but if you miss the 3 top-performing days of the year because you have been scared out of the market, you will miss up to 70% of the uptick (or the recovery, in this case). As we have seen in the last days of December 2018.

In summary, there is no single right answer for everyone. Except maybe to reiterate the fact that “Investing is simple, but not easy”. The philosophy of MeDirect is to focus on the things we can control, and try to manage as best we can what is beyond our control. That is we minimize the volatility of the markets through smart and dynamic asset allocation in our Model Portfolios.

As a result, our performance targets remain valid over the medium term.

The above is for informative purposes only and should not be construed as an offer to sell or solicitation of an offer to subscribe for or purchase any investment. The information provided is subject to change without notice and does not constitute investment advice. MeDirect Bank (Malta) plc has based this document on information obtained from sources it believes to be reliable but which have not been independently verified and therefore does not provide any guarantees, representations or warranties. MeDirect Bank (Malta) plc, company registration number C34125, is licensed by the Malta Financial Services Authority under the Banking Act (Cap. 371) and the Investment Services Act (Cap. 370).