08/05/2024

The most experienced investors are aware that financial markets are inherently unstable and experience moments of turmoil from time to time. In fact, the main characteristic of markets is their volatility. In a famous anecdote attributed to the great financier JP Morgan, it is said that he replied with a simple “it will fluctuate” when a passerby asked him what the market was going to do in the future.

In fact, since the 1980s, the markets have always experienced price drops at some point of the year, although 75% of the time, the market ends up rising in the year as a whole. In fact, there are events every year that result in investor pessimism and market drops, but the structural trend is always bullish.

In this podcast, we will try to present a few simple points that can help you make it through these moments of uncertainty and avoid, as far as possible, making decisions that end up penalizing your financial health and endangering your long-term goals. The first tip is simply this: markets always recover. It may take a long time or a little, but broader and more diversified market indexes will, in all likelihood, end up exceeding their previous all-time highs.

This leads us to the second tip: investing is an activity that needs a long-term investment horizon, and the longer, the better. Time always works in our favor. Against this backdrop, a few years ago an investor gave us a surprisingly simple recipe for success: I always buy and never sell. My assets increase accordingly. This simple formula alerts us to the importance of maintaining an investment discipline through a process of systematic purchases that allows us to buy at increasingly low prices in a bearish market.

It is essential to have a broadly diversified investment portfolio. If we limit as much as possible the specific risks related to a particular financial market or asset, we can enjoy relative peace of mind in turbulent times, since we will keep our portfolio from suffering a disastrous blow, which would be possible if we invested in a single company for example. Don't obsess over short-term risks: by the time the economy is the lead story in the news, the worst is likely to be behind us. Financial markets are always a step ahead, and are often recovering when the situation seems darkest.

Actively seek out opportunities. A market drop is an opportunity to buy shares at cheaper prices. If we stick to our long-term goals, investing when the market is at a low point can give us an advantage. Similarly, when the market panics, everything, both good and bad, is sold. An experienced investor will be able to take advantage of the price of a good stock that has been unduly beaten down.

Trying to time the market doesn't usually work. Nobody knows when market highs and lows will occur. It is also important to remember that the largest market increases occur in times of highest volatility. You may have already seen the statistic that says that, in the last 20 years, losing out on the 10 best stock market sessions would have meant giving up half of the total gains compared to an investor who had stayed in the market the whole time.

Let's now discuss one of the most valuable tips we can offer: avoid making emotional decisions, and limit as much as possible how fear or greed guide your actions. This requires training over many years, and there are investors who simply can't help but to be overcome by these emotions. Of course, it makes sense to worry about one's daily losses and consider exiting the market, but remember that bearish markets come and go, and the market spends a lot more time going up than down. In many cases, to keep these emotional biases from harming us, we might opt for a discretionary investment service in which the decisions are made objectively by a professional, with no room for emotions.

In short, to use a nautical analogy, we can all sail with the wind at our back, but we will need all our experience and skill when the wind turns against us. Similarly, never forget your financial goals, since, to continue the nautical theme, no wind is good if you don't know where you're going.