Information is the fuel that powers the financial markets. It provides investors with the tools to navigate their investment choices, while increasing the efficiency of markets by ensuring that asset prices reflect the realities of the world as accurately as possible. But as is often the case with many things in life, it is possible to have too much of a good thing, and an excess of information can lead to noise, which adds no real value in forecasting the future direction of markets but can trick investors by presenting false signals.
We live in an age of data, and the Covid-19 crisis has proliferated the production and distribution of all kinds of data from right across the world. The data emerging day-by-day on the human cost of the virus is shocking, closely matched by the eyewatering predictions of widespread economic damage. On the economy, early comparisons with the SARS outbreak in 2003 have swiftly given way to comparisons with the Spanish Flu and even WWII.
The crisis has captured the attention of the entire world and opinions on what may, or may not happen, are growing daily. Combined with the shocking data on the speed of the market decline and the projections of potential economic damage, this will invoke a strong emotional response among investors and may influence them to sell their holdings and crystallise any paper losses.
Our parent company Quilter, a leading wealth management firm in UK and internationally, has researched investor behaviour to confirm that a 10% market fall can prompt up to 17% of those without a wealth manager to ‘panic sell’ their holdings. This is a classic fight or flight reaction when the market is at the bottom.
Nobody has a crystal ball and the situation is evolving so rapidly and unpredictably, that it is easy for investors to become overwhelmed with the noise and make changes to their portfolios. There is never a more vulnerable time for an investor than a market correction, and these turbulent times demonstrate the value of a wealth manager and a sound investment plan.
The world of investing is overflowing with metaphors, adages and fables and a wealth manager will be able to ration the supply of information and ensure that the noise does not jeopardise your investment journey. Often, the best investment decision is to take no action at all.
Wealth managers will also ensure that you avoid succumbing to your emotional weakness. The foundation of any good investment strategy is that it is aligned to your risk tolerance, attitude to risk and capacity for loss in a downturn. With markets crashing all around, you will take great comfort in the knowledge that a plan is already in place, and this plan has considered the potential impact of any turbulence in the markets.
Risk and volatility will always be a part of financial markets, and without it there would be no reward for investors. It is true that this downturn has been quicker and sharper than anyone expected, but that is the nature of risk – it comes when you least expect it.
We all know that timing the market is almost impossible, and the evidence suggests that investing for the long-term allows investors to cut through the short-term noise and market volatility to weather the storm, and capitalise on the positive equity performance which tends to follow a rapid market reversal. Only a capable and experienced wealth manager will be able to tune out the noise and provide peace of mind in these difficult times. So, contact us today for a free financial planning consultation.
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