The garden analogy is a good one in this case. After Hurricane Ivan hit the Cayman Islands in 2005, our trees were uprooted, our bushes stripped of their leaves and our gardens destroyed. But even as we surveyed the devastation, we knew, just as when we hit the depths of the market downturn, that our gardens would once again flourish. As with market forces, our gardens have grown back, albeit after some clean-up and tending.
The same happens with markets. Gardening is a long-term proposition and, unless we have a major disaster, there is little reason to uproot our plants and start anew after just six months. Even if weather ravages the garden, as with hurricanes, we salvage what we can, take some measures to foster re-growth and let nature take its course. Planning a retirement portfolio is not that different when we consider that, after agreeing on a strategy, it would appear foolish to sell everything and start again after just a few months.
Reap the rewards
Following a major market crisis, as we experienced in September 2008, investors with a long-term vision did not abandon ship and swim to shore. They may have sought protection, particularly in the form of necessary portfolio adjustments, but did not leave the market altogether. After all, history shows that markets typically rebound after a major sell-off.
During the Great Depression, which brought the global economy to a slowdown that was far more severe than what we have recently experienced, the S&P 500 lost a hefty 89 per cent between 1929 and 1932. However, the index rebounded with a 206 per cent gain over the following three years. Those who stayed invested, or came in to the market as it took a nosedive, undoubtedly felt the pain, but were rewarded handsomely.
Naturally, investors who benefitted most from the market rebound were those who stayed informed and “planted” the right investments in their portfolios. As markets rebound, those equities and other assets that are helping to take the market higher are unlikely to be the same ones that caused it to drop. So, to take advantage of the rebound, it is best that investors keep a close eye on the sectors and geographic regions that are leading the recovery.
Yet, just as market declines are likely to unleash panic, some investors may also get the jitters amid the recovery due to the typical volatility involved. There will generally be technical corrections along the path to recovery and intermediate market declines of as much as 10 per cent are not uncommon. These should not provoke knee-jerk reactions in terms of long-term investing.
Put away the crystal ball
An important point to remember is that trying to time these market corrections is generally an exercise in futility. Attempting such predictions could push investors to the sidelines in cash when there is a strong push forward. Short-term market timers usually end up increasing investors’ risk levels unnecessarily. Investors, nevertheless, should consider keeping up to 10 per cent of their assets in cash in order to take better advantage of such market corrections.
Taking advantage of the recent recovery requires investors to remain focused, continue to diversify, be prepared to cut their losses on underperformers and stay informed. Seeking expert advice from a reliable investment firm with a wide variety of products is also crucial. Investors should entrust their money only to those firms with the track record and know-how to keep it safe and make it grow.
As in a downtick, investors in a rebounding market environment must never lose sight of the fact that the keys to success lie in taking a long-term view, maintaining a diversified portfolio and making rational adjustments rather than rash emotional decisions. If those investments are aimed at creating a comfortable cushion for retirement, then adhering to these tactics becomes even more important. Planning one’s future is overwhelming enough without having to add more stress to the process, for which finding the right investment instruments run by reputable managers is always part of a winning strategy.
The end-game is to make the garden flourish and once again enjoy its blossoms, even if one has to tackle some weeds along the way. As investors, we must keep on planting and must do so wisely to foster the greatest yield. As Thomas Cooper once said: “A garden is never so good as it will be next year.”