By Nigel Green, founder and chief executive of deVere Group
Since last summer, the global financial markets have been turbulent.
The volatility has seen most major benchmark indices, including China’s Shanghai Composite, the UK’s FTSE, Japan’s Nikkei, Hong Kong’s Hang Seng, America’s S&P500 and Australia’s S&P/ASX 200, seesawing in recent months.
The main drivers of the headwinds have been, and continue to be, varied. They include the slowdown in China – the world’s second largest economy, unstable oil prices, downward revisions of global growth, the slump in commodities, the Federal Reserve introducing possible further interest rate hikes, the Brexit referendum to decide whether Britain remains in the EU, the uncertainty being generated by the U.S. general election later this year, and the concerning security issues facing the world.
Bearing all this in mind, it would be easy to see why investor sentiment could be low.
However, in many ways the supposed gloom is allowing many investors to get ahead of the rest. These are the investors who are aware of the three important reasons for investors to be cheerful right now.
Let’s take a look at these.
Number one: the long-term advantages. Forecasting exactly when the markets will bottom-out is virtually impossible. And it is a fool’s game to take anyone’s predictions on this matter too seriously. No-one knows for sure.
That said, what is a given is that stock markets are pretty predictable over a longer time horizon: they rise over the long term. Stock markets’ beneficial performance over the longer term is, in fact, the reason why investing in stocks is widely regarded as one of the best methods investors can use to build wealth.
By contributing extra money to portfolios now, rather than putting it off, investors are able to capitalise on the gains sooner rather than later. Putting off investing means the exact opposite, of course.
Number two: the buying opportunities. When the markets slump, it’s typically a good time to put new money to work in the markets at lower prices. It’s the time to go bargain-hunting as there are high quality equities available at far more favourable costs. For instance, in some sectors, stocks have reached 2008 levels, although the underlying economic environment is very much improved.
And, as previously mentioned, with stock markets going up over the long term, it is prudent to take advantage of the more attractive prices of the stocks you favour.
Number three: it is easier and more cost effective than ever before to invest internationally. This is beneficial because to ensure portfolios are properly diversified – which investors must always do, especially in times of volatility to mitigate risks and be able to position themselves to take advantage of the upsides – it’s important to invest across different geographical areas.
Indeed, considering the current market landscape and the forecasts, many experts argue now is the ideal time to think about adopting a more global outlook for portfolios.
With this in mind, it is time to debunk a myth: it is not riskier to invest globally than in one’s home country and/or region. In fact, it could be legitimately argued that the opposite is true because the greater diversification that is achieved by an international spread, the greater the reduction of overall risk to the portfolio. Neither is it true that investing globally is for sophisticated investors only as there are many well-managed funds on the market that offer exposure to international stock markets by employing a myriad of methods.
So despite the gloom-laden headlines fuelling a certain kind of ‘doomsday prepper’ mentality, there are clear factors as to why rational investors should be optimistic. Indeed, many would insist that not only should they be optimistic, but that they should be using the current turbulence to their financial advantage.
Having said that, there is no doubt that many markets are in bear territory at the moment and investors must remain cautious to the challenges that are presenting themselves now and also be vigilant to those that may potentially arise in the near future.
One of those factors of which to remain cautious are the overly keen analysts who will try to tell investors that there are no headwinds; that everything is just rosy.
In short, being overly cautious is dangerous as you could miss out on the huge upsides currently being showcased; and being overly care-free is dangerous as you could expose yourself to unnecessary risk.
As ever, some moderation and a well-devised plan is required. It is best to maintain a policy of drip-feeding new money into the markets at a steady and pre-arranged pace. In addition, a good fund manager will be able to help investors capitalise on the opportunities the volatility brings and sidestep potential risks.
To conclude, amid the stories of ‘dark clouds on the horizon’, investors should still be looking on the brighter side if they’re serious about accumulating wealth.