In times like these, marred with seemingly radical political uncertainties, market highs, market lows, and a sea of endless innovations and emerging technologies, it can be a challenge to identify when a market may turn down or whether the downturn will be a sharp one.
The issues we see today are not new, are by no means out of the ordinary, and have been seen repeatedly throughout history. What is new, however, is our connectivity to each other and the way we receive information. This, of course, creates both a positive effect and similarly a very negative effect.
Western media often complicates the case further. You may read on a Tuesday about why well-diversified mutual funds are a favourite, only to learn about impending market doom on a Wednesday. Finding the agenda behind the written word often unearths a plethora of bias and often damning opinion.
This shouldn’t be the case, should it? Even now I have my own agenda behind this piece, although I hope my self-awareness will help me to avoid making grave mistakes to feed my own desires, financial or otherwise.
For these reasons, it is important to start planning and considering the next market downturn, not as a means for “getting out of the market,” but in terms of preparing how to take advantage of the next investment opportunity. Don’t be mistaken: Market unrest, plunging indexes, and stalled economies are not a good thing. They represent tremendous upside for those who manage funds, as well as individual and family portfolios.
Several years ago, the global economy fell sharply, followed by housing crisis from the U.S. to as far as Dubai, and subsequent banking and corporate governance failures around the world.Conditions were grim. Investors and financial advisors were cautioned to “wait out the storm” and keep their money on the sidelines, preparing for when the market would “turn.” It is difficult to guess where the market is going, and as we are taught, a reactive response will generally fall distant second to being proactive. For this reason, many of those who identified opportunities during a time of restricted lending and regulatory hurdles were likely rewarded with the economic growth experienced in the years following the crash.
Drawing on my own experience from that period of time, I am sharing four tips that you may consider helpful:
1. Multiple exit strategies: Many investors lost money on investments that weren’t outstandingly great in 2008 because they followed suit and assumed they would make a profit as a result of rising market conditions only. You must always assume that there will be a market downturn with every investment you make, and account for this. We have learned this over time, and now look for multiple value generators in any investment we commit to. Ensuring we protect our capital in case of economic issues beyond our control is of utmost importance!
2. Hedging: Investors who invest all of their capital in high-return investments with no capital protection lost all monies in the last downturn. If they would have diversified their position and essentially hedged their investments, they would have at least protected their capital. Always protect your capital by hedging your investment and diversifying.
3. Acquire nerve, not fear: Always be prepared to hold your investment. In the property market, the investors that lose the most amount of money in a property crash are the ones who lose their nerve and sell their investments to "mitigate loss." Usually this is conducted at the wrong time, and for the wrong reasons! Mostly, this occurs as the person cannot afford to hold or does not understand their investment properly. A property crash is the time to buy! Shares and property are great things to acquire when purchased correctly in a downturn. If you are prepared to hold an investment during a downturn, you will inevitably see your investment grow again as is the nature of market cycles. This is why we use the principles above to make sure that this is possible.
4. Media: Remember that in the marketplace, if you are hearing it on the news you are too late. We can now use apps and the internet to get alternative news and find information which is not yet news to base our market opinions on. I personally gather my information from different sources globally and look to use this information to make my decisions. Experts, not "sources," can assist the development of your investments greater.
Hopefully my experience serves as a model for creative thought and approach when it comes to investing. Inevitably, the market will turn sour for some period of time, and when it happens those who wish to protect their client’s assets must have a plan. Rather than waiting and executing the same passive plan as everybody else, potentially missing an opportunity to take advantage of these market scenarios, fully develop your strategy and follow through. A proactive investor is a smart investor!
Simon Calton is CEO of the Carlton James Group.