Keep a steady hand in up and down markets

Kate Warne, PhD, CFA, Market Strategist, Edward Jones: Watching short-term share price gyrations can be nerve-wracking, particularly after such large declines in an environment of worsening economic news. The volatility of the stock market and of individual shares has increased considerably compared to the past.

As a result, we suggest paying closer attention to the diversification of your portfolio and the quality of your investments. Now might be a good time for a portfolio review, as the downturn may have altered the outlook for some of your investments. Whilst a diversified portfolio of quality investments generally declines in market downturns, diversified portfolios have historically had the resilience to survive during difficult times and rebound when the environment has improved. Despite the volatility, long-term investors are also taking advantage of opportunities to buy shares in quality companies while their prices are down.

An Opportunity to Own Quality Companies

At times such as these, people tend to forget that shares represent ownership in companies that provide consumers with a variety of products and services. Whilst share prices may vary greatly in the short term, over the long term they tend to rise or decline in line with the company's expansion of its profits and business. Some of the best opportunities for long-term investors occur when a company's business has not changed much, but the price of the shares reflects a more pessimistic outlook. Many of those opportunities may be in companies providing everyday products and services.

Long-term investors may want to consider adding well-priced shares in quality companies that:

Meet everyday consumer needs
Provide utility services
Address healthcare needs

The share prices of these companies have declined and yet demand for most of their products remains firm. For example, people continue to wash their dishes and clothes, brush their teeth and buy petrol, whether times are good or bad. They pay utility bills for gas, electricity and water services. Even in difficult times, most people take their medicines to avoid serious illness and hospital stays. Economic challenges may curtail the growth of these companies, but any impact tends to be less than for other items.

You can build a diversified portfolio by owning shares in such companies and others directly and using mutual funds (unit trusts) that include them. Most investors will include both, as well as fixed income investments.

Achieving Your Financial Goals

Bear markets are unsettling, even for long-term investors. Declining portfolio values appear to threaten short-term plans and long-term success. Whilst no-one knows when the market will rebound, long-term investors have achieved success in the past by staying invested in quality investments, adjusting their portfolios to maintain appropriate diversification and adding equities following large price declines. This is a particularly good time to choose equities in your ISAs and other retirement accounts, as your contributions are buying more shares than in the recent past.

The last years we saw such large downturns was 1973 and 1974. Investors experienced a large decline in the first year they invested, but by the end of a decade they had earned above-average returns.

Shares appear to have declined as though the economy is going to suffer as it did in the mid-1970s. If it doesn't, then current prices represent an opportunity.

Long-term investors realise the stock market has experienced 10 previous bear markets since 1948 and has rebounded from each. Work to remain focused on your goals and remember that to be a long-term investor means you must remain invested every day.

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