It’s always the right time to talk about long-term investing, and now might be a particularly good time, with stock markets near all-time highs and uncertainty all around. In other words, better to pulse-check now than when markets are trending lower and emotions are running high.
You may already be wondering: Are we trying to brace investors for the prospect of a market downturn? The short answer is no—and yes. "No" because we can't predict how the markets will perform in the coming days, weeks, or even months. "Yes" because we know that sometimes-significant downturns are a given in investing. Disciplined investors accept this and cling steadfastly to their goals to weather the occasional storms.
The economy and markets are sending mixed signals
Major economies remain in the throes of the COVID-19 pandemic, and most expect fiscal and monetary policy to remain supportive in the months ahead. However, in a still-distant future, the unwinding of support as COVID-19 is addressed and economic activity correspondingly picks up will have implications for economic fundamentals and financial markets.
Central banks have signaled their intentions to keep interest rates low well beyond 2021, but forward-looking markets will eventually price in rate hikes. This means the low rates that have helped support higher share valuations will eventually start to rise again. Higher inflation at some point is also another risk to watch.
It is also worth noting that equity indexes in many developed markets appeared to be valued fairly but toward the upper end of ‘fair value’ estimates. To that end, the Standard & Poor's 500 Index finished 2020 at a record high and has done so six more times already in 2021.
Volatility that has accompanied recent high-profile speculation in a handful of stocks and even commodities only adds to the uncertainty.
So let's briefly talk about the value of long-term investing. As the illustration below shows, market volatility is a fact of life for investors, and so are market downturns. The good news is that, in the past, the market has typically rewarded disciplined investors who take a long-term view.
But it isn’t easy, investing is tough. Having been an active Financial Advisor for four decades, I can personally attest to the fact that, with each economic cycle comes new sets of challenges and worries (ie GFC, Brexit, Covid etc), and yet the associated emotions - fear and anxiety at one end of the spectrum, and raging optimism at the other (along with the overwhelming desire to solemnly declare “but its different this time!’), are all too familiar.
Whether or not a downturn is on the horizon is open for debate. But now would be a good time to prepare - focus on the things you can control, have clear, appropriate investment goals, diversify across asset classes and keep your costs low. And if you’re in doubt, seek advice from a trusted source.
