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5 ways to keep calm during a financial storm

Source: AAP

It’s hard to describe that gut-wrenching feeling you suffer as an investor when you wake up, check your smart phone, and realise global markets have ‘collapsed’ overnight.

Markets fall sharply, on occasion. That’s a sure bet. Timing those falls is next to impossible, however.

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The markets fell heavily during the course of the financial crisis. They also slipped back in 2012, prior to the election of Donald Trump, and twice this year (once in February, and then, again, this month).

Each time the market falls there’s a sense of foreboding. But there doesn’t need to be too much apprehension.

Here are some thoughts to keep it all in perspective.

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1. Investing over the longer term

Here’s a timely reminder: over the long term, the share market rises.

Look at any chart you wish. They all have an upward trajectory. The reality is that as economies grow, companies grow with them, as do stock markets – it’s a basic feature of modern capitalism.

That means if you start building a share portfolio in your 20s, or even just rely on superannuation, you’re likely to enjoy the fruits of a heard-earned nest-egg later in life.

2. Superannuation

And speaking of superannuation, there’s actually a big difference between how those in their 20s, and those approaching retirement should respond to major market events.

As I mentioned, those in their 20s can relax. For those approaching retirement, action is required.

For example, withstanding one or two major share market falls is not the end of the world. What you want to avoid is holding onto a share portfolio through a bear market on the doorstep of retirement.

That could see your income fall upwards of 20 or 30 per cent in the space of just a few months. Imagine if someone told you when you were earning $80,000 that, from next year onwards, you would have to learn to live on $50,000 or $60,000? You would need to make some painful adjustments.

Worse still, if you come close to losing most of your nest-egg – which is entirely possible if you don’t get going on your investments until your 40s or 50s, you’re facing a retirement on the pension.

The pension is nothing to be sneezed at, but you can forget overseas holidays and being able to buy that nice SUV you’ve had your eye on for the past 5 years.

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3. Smart investing

That leads me to what I call defensive investing – much like defensive driving.

We all know there are lunatics on the road. We see it when we’re out driving, and on the news at night. A solution? Driving defensively.

Defensive driving is about going at a safe speed, keeping a safe distance behind the car in front of you, and being on the look-out for dangerous situations.

Equally, when investing, it’s important to keep an eye on global market developments. You never know what’s around the corner. It’s also important to accept a lower portfolio growth rate (akin to driving a little slower on the road).

The stocks that travel slower won’t provide you with any exciting returns, but they will provide you with perfectly respectable returns over the long-run.

In addition to that, defensive driving will have you staying in the same lane for as long as possible (because changing lanes is inherently dangerous). Likewise, when investing, it’s helpful not to trade too much. There are standard “defensive” asset classes and stocks that are tried and trusted. They’ll keep you relatively safe during a financial storm.

4. Safer assets to bear in mind

When you’re thinking of ‘safe’ or defensive stocks to buy, keep in mind stocks that produce goods that are needed by society.

Obvious ones include utility companies (gas and electricity), healthcare stocks, and shares in consumer staples like supermarkets and wholesalers.

These companies are terribly dull to invest in, but, over the long run, these are precisely the sorts of companies that can weather a financial storm or two.

There are also ‘safe’ asset classes to choose from. The most obvious one is of course cash.

There are others too. You can invest in the bond market, for example, or spread your ‘risk’ with an exchange traded fund.

5. Dividends

The final point I’d like to make is related to dividends.

We know that you can invest in low return stocks in order to secure your portfolio. Or you can try bonds. Please also spare a thought for companies that produce solid dividends.

You see if you’re investing over the longer term, the capital gain will speak for itself. If, in addition to that, you progressively own more and more stocks with high dividend payouts, well, you’re setting yourself up for a nice passive income stream later in life.

Dividends don’t come with the thrill of a stock market ride, but a well-diversified, strong portfolio of stocks paying solid dividends could certainly help you through a financial storm or two.

End note

If you want to ride the market, you’ll need to ride the storms too. If you’re keen for a smoother sail, maybe jump on a bigger, slower boat – or to expand on my previous metaphor – go with the family-safe station wagon. It’ll have you arrive at your destination in one piece.

@DaveTaylorNews