Introduction
Investing in the stock market can be a rollercoaster ride, and volatility is an inherent part of the experience. 2022 was a good example. As markets fluctuate, it's not uncommon for investors to feel a sense of panic. However, reacting emotionally to market turbulence can often do more harm than good. In this article, we'll explore why it's important not to panic when the markets are volatile and how maintaining a rational, long-term perspective can lead to more successful investing. At AP Advisers, we always maintain that time IN the markets (as opposed to TIMING them), is the secret to long-term investment success.

1. Volatility is Inevitable

First and foremost, it's essential to understand that market volatility is an intrinsic feature of the financial markets. Economic, political, and global events, as well as a myriad of other factors, influence market behavior. Volatility is not a sign that something is wrong with the market; it's just the market being the market.

1. Timing the Market is Nearly Impossible

Trying to predict market movements and time your investments perfectly is a largely fruitless endeavor. Even seasoned professionals often struggle to consistently time the market, let alone individual investors. Timing the market successfully requires not just one correct prediction but a series of them, which is incredibly difficult.

1. Long-Term Perspective Matters

Instead of focusing on short-term market fluctuations, successful investors take a long-term perspective (min 5-10 years). Historically, most major stock markets have shown an upward trend, despite periods of volatility. Over time, the market has delivered solid returns to investors who have remained patient and stayed invested through the ups and downs. For example, the Tech-heavy US NASDAQ is up 74.7% in the last 5 years. India even more so, +82.1% (as at October 31st 2023).

1. Diversification Reduces Risk

Diversifying your investment portfolio across various asset classes, such as stocks, bonds, real estate, commodities, and even cash can help mitigate risk during market volatility. Diversification spreads your investments across different sectors and reduces the impact of a downturn in any single asset class. Indeed, cash has delivered decent interest in recent times, and the fixed income sector (bonds), which is traditionally a lower risk asset class, looks set for a bull run as and when interest rates reduce.

1. Panic Selling Can Be Costly

When panic sets in and investors start selling in a declining market, they often end up realizing losses. Selling in a downturn locks in those losses and makes it difficult to recover when the market rebounds. It's important to remember that markets have historically rebounded sharply after periods of decline. It is much easier to fly from risk than to know when to get back in.

1. Staying Invested Aids Recovery

History has shown that markets tend to recover and grow over the long term. Missing out on these recoveries by pulling out of the market during a downturn can significantly impact your overall investment returns.

1. Opportunity in Volatility

Volatility can also present opportunities. When stock prices are lower, it can be an attractive time to buy quality stocks at a discount. Savvy investors use market volatility to their advantage and buy in cheaper. Investors who make regular contributions can often benefit from ‘dollar cost averaging’, which means that more shares are bought due to their lower prices, and that additional quantity can help manifest the returns when the market recovers.

1. Emotional Decisions Can Lead to Regret

Emotional decisions, such as panic selling or making impulsive investment choices, can lead to regret in the long run. It's common for investors to wish they had stayed the course during turbulent times. Maintaining a rational, disciplined approach to investing can help avoid these regrets.

1. Seek Professional Advice

During turbulent market conditions, it can be helpful to consult with an investment professional who can provide guidance and perspective. A knowledgeable advisor can help you make informed decisions that align with your long-term financial goals.
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Conclusion
While market volatility can be unsettling, it's important to resist the urge to panic and make emotional decisions about your investments. Instead, focus on maintaining a long-term perspective, diversifying your portfolio, and seeking professional advice when needed. By doing so, you can navigate the ups and downs of the market with confidence, ultimately working towards your goals and securing your financial future.

 

For our July blog, we would like to share an article written by LGT Wealth Management UK regarding the benefits of disciplined long-term investing... 

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves." – Peter Lynch, Mutual Fund Manager

During periods of heightened financial market volatility, and increased levels of uncertainty, it can be tempting to try and time the market by selling assets and then buying them back at a later stage. However, timing the market is virtually impossible, even for the most experienced investors. This is why it's often said that time in the market is more important than timing the market.

Emotions and investing
Human nature can lead investors to be emotional about financial decisions. When markets dive, too many investors panic and sell; when stocks have had a good spell, too many investors go on a buying spree.
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Past experience can lead to panic selling
People tend to ‘panic sell’ based on their past experiences. There have been six major crashes in the past 30 years, so psychology plays its part.​ 

It is never an easy ride on the way up in a bull market. Investors seem perpetually concerned, worried about the valuation levels, forever peering around the next corner and ever watching for the canaries in the coal mine that might signal the onset of the next market downturn. Prospect theory from behavioural finance suggests that investors are more likely to focus on gains rather than the perceived risk of loss when the outcome of an investment is uncertain. This ties into regret aversion and the fear of loss outweighing the joy of winning – hence many investors panic sell when the going gets tough. This is a large reason why investors are always encouraged not to look at their investments every day.

The issue with trying to time your entry/exit 

The pace at which markets react to news means stock prices have already absorbed the impact of new developments and when markets turn, they turn quickly. Those trying to time their entry and exit may actually miss the market bounce. Attempting to predict the future, may mean you could end up being out of the market when it unexpectedly surges upward, potentially missing some of the best performing days. Missing one or two big days, compounded over time, can greatly impact your portfolio.

The graph below illustrates how a hypothetical $100,000 investment in the S&P 500 Index would have been affected by missing the market’s top performing days over the 20-year period from 1 January 2002 to 31 December 2021. For example, an individual who remained invested for the entire time-period would have accumulated $616,317, while an investor who missed just five of the top performing days during that period would have accumulated only $389,263.

Japan is to revise its tax exemption system for the NISA (Nippon Individual Savings Account), starting January 2024. NISA investments are exempt from tax normally levied on capital gains and dividends, and maybe useful additions to a diversified long-term portfolio.

The NISA account is designed for individuals to self-select and manage a portfolio of funds or stocks, with a tax advantage to entice the piles of cash sitting in Japanese bank and post office accounts, as well as from under the futon!
 
Under the new NISA system, the Tsumitate NISA (for regular monthly contributions invested mostly in mutual funds), the maximum annual investment will increase from the current ¥400,000 to ¥1,200,000.

In addition, the General NISA which accepts ad-hoc lump sums (5 years tax exempt) will be replaced by a so-called 'growth investment framework' that will include listed stocks. It will be available alongside the Tsumitate, and the maximum annual contribution will be increased from ¥1.2 million to ¥2.4 million.

The lifetime tax exemption limit will be raised to ¥18 million of contributions, of which up to ¥12 million can be applied to the growth investment framework. The current 5-year limit on the tax exemption on capital gains will be abolished under the new system, with no limit. 
 
The new NISA accounts may be an option for regular savers planning to stay in Japan for the long term (10+ years). To the best of our knowledge, these accounts are only offered in the Japanese language, so we urge you to make sure you fully understand the terms and conditions when signing up. Another point to bear in mind is that you may be forced to sell your NISA investments when leaving Japan permanently, and that may be at an inopportune time in the stock market cycle.

In summary, a potentially useful complement to your portfolio of diversified assets due to the tax freedom on any capital gains and dividends. However, like any risk-based asset, the value of a NISA can fall as well as rise, and you may not get back the money you invested. The language barrier can be an issue for some, and an untimely departure from Japan may have an effect on what you ultimately get back.

We are most grateful to the production team at the British Chamber of Commerce in Japan, to present ourselves and our services in video format! Our Senior Investment Adviser, Rob Williams spends 7 minutes explaining who we are and what we do.

We are reaching the end of a challenging year for financial markets. Interest rates are starting to squeeze households, the war in Ukraine continues, China struggles with its COVID policy, and many economies may already be in recession. The housing market has also experienced a slowdown across leading indicators such as construction activity, mortgage lending and most recently in sales prices.

Touching on investment matters, we’ve seemingly found some relative calm among stocks and bonds recently. Although we may still be in for further short-term volatility, it is hoped that in 2023, interest rate increases can be slowed or even stopped, as central governments grapple with inflation. This should give stocks a springboard for recovery sometime in 2023 and beyond, as long as corporate earnings fall within expectations and there are no extraordinary geo-political events.

Your Portfolio in this Environment

People have a habit of saying we're in a period of high uncertainty, yet we’ve never actually lived through a period of low uncertainty! For those that lived through the late 1970s and early 1980s, many will remember it was a similar environment that set the stage for a strong market tailwind. History shows that market recoveries can occur when they are least expected and can be short and sharp. They can also occur prior to economic recovery. That's why it is so important to be a participant in the markets. How we react to these challenging times will have a significant impact on our long-term financial goals, so we continue to preach the old adage that the true key to investment success is time IN the markets, not TIMING the markets!

The Bigger Picture: What You Should be Focused On

Very few investors have escaped the recent volatility and it is normal if 2022 has made you feel uncomfortable. However, we have reasons to remain hopeful for a more prosperous 2023. Rome was not built in a day, and those who maintain a long-term investment outlook should eventually be rewarded. Unless an investor is considered a 'high risk' strategist, we continue to adopt the traditional approach to asset allocation; a spread of cash, equities, bonds and property as part of a balanced portfolio. 

For the long-term investor, US equities have historically delivered a return above 'normal' inflation. As we reach a peak in interest rates, it is anticipated that the fixed interest sector (bonds) may finally deliver some returns for investors. The ESG story is now an integrated part of of companies' corporate philosophy, so we feel that the sustainable and renewable sectors (energy, water, wind, EV's etc) will become ever more significant over time. At the higher end of the risk scale, we may finally see Chinese equities perform better as COVID restrictions lift. 

This is not a solicitation to invest in these sectors, just some areas of interest to keep an eye on. Additionally, past performance is no guarantee to future returns. 

At AP Advisers Ltd, we strive to act as a steady hand and look forward to helping you with all aspects of your financial planning needs looking ahead. We are just an email or call away if you wish to discuss any concerns.

The AP Advisers team wishes you a happy and relaxing holiday, and health and success in 2023.