The global sell-off in equities on Monday causing markets to shift into a risk-off mode should not unduly worry long-term investors and they should stay the course, experts say.
Instead, they should use this opportunity to buy quality assets at a cheaper price point, they recommend.
“For long-term stock market investors, the recent drop is just business as usual. The stock market is supposed to be volatile,” says Sebastien Aguilar, who heads the non-profit community SimplyFI.org, which encourages investors to follow the investment principles established by John Bogle, the founder of Vanguard.
wealth adviser at UAE-based Sarwa
“Investors should expect market drops on a regular basis and full market crashes every few years. This is why our portfolios also include a significant allocation to non-stock assets such as bonds.
“For investors who have a lot of assets invested, what's important here is to zoom out, remember the long-term game, turn off financial news and control one's emotions. And for those who are in the accumulation phase, this is a great opportunity to invest more.”
Major indexes and stock market futures fell sharply on Monday, driven by growing US recession fears. These concerns were heightened by the release of the US jobs report on Friday, which raised worries about the strength of economic growth.
The US Labour Department reported that the economy added 114,000 jobs last month, down from 179,000 in June and well below economists' expectations of 185,000. Meanwhile, the unemployment rate unexpectedly rose to 4.3 per cent, its highest level since October 2021.
Additionally, continuing geopolitical tensions have contributed to the uncertainty and market instability.
Investors are now gripped by fears that the US Federal Reserve has waited too long to pivot on its policy.
The market consensus shifted dramatically, now expecting the Fed to slash rates significantly this year. The market is now pricing in about 120 basis points of Fed rate cuts before year-end, all driven by recession fears, according to Fawad Razaqzada, a market analyst at City Index and Forex.com.
In fact, investors are now bracing for a 50-basis point cut in September, double the 25 basis points they were anticipating before, he says.
A number of factors have contributed to the recent stock market volatility, including concerns about a slowing US economy on the back of worse-than-expected jobs data causing the Sahm Rule – a recession indicator, Berkshire Hathaway halving its Apple holdings and Intel laying off 20 per cent of its workforce, says Martin Hennecke, head of investment advisory for Asia and the Middle East at St James’s Place, a financial advisory.
Other factors include concerns about tech companies delivering on their AI promises, renewed geopolitical worries as well as a sharp sudden rally in the yen following the Bank of Japan’s unexpected interest rate increase last week, he adds.
Mr Aguilar says: “As long-term investors, we don’t try to time the market. We simply buy, hold and stay the course. We stay the course when the markets go up. We stay the course when markets go down."
“Nobody can reliably predict the short-term future of the stock market, but in the long run it's always been up. Most of our investment is money we don't need in the short term, so we have time to see it recover.”
Similarly, Steve Cronin, a financial independence coach and founder of DeadSimpleSaving.com, says anyone who liquidates their portfolio in a panic may get punished by taking a loss now and then possibly missing out if the market bounces back quickly like in 2020.
See this as an opportunity to practise staying calm during a stock crisis, he recommends.
Akshay Iyer, a wealth adviser at the UAE-based investment platform Sarwa, says: “A stock market dip for medium and long-term investors is often a great opportunity to continue investing. For ETF investors who are in a globally diversified portfolio, they have an opportunity to buy the same good quality assets at a cheaper price point.
“When the markets pick back up, as they usually do historically, they will be in a much better position. The best course of action would be to ignore the market noise and short-term dips because if you’re a long-term investor, by the time you need the money you won’t even remember the dip.”
One of the worst things that investors can do is to panic sell and liquidate their investments. If your goals are long-term, ride the investment wave and be patient. Trying to time the right moment to liquidate and re-enter is nearly impossible, and investors who do this often perform worse than if they just stayed invested, according to Mr Iyer.
Global markets have historically performed very well over long periods of time, so it’s crucial for investors to avoid making impulsive decisions based on short-term market fluctuations, he warns.
Richard Hunter, head of markets at Interactive Investor, says investing for the longer term allows for the power of compound interest (such as the reinvestment of dividends) to play its part.
“The crash of 1987, known as ‘Black Monday’, the dot-com boom (and bust) at the turn of the century, the great financial crisis of 2007/2008 and the global pandemic all had negative impacts – and from all of which a sharp recovery followed,” he says.
“There is little to suggest at the moment that the current weakness will prove to be of that magnitude, but the ability to look through the ‘noise’ of events large and small, the psychological detachment, is a vital part of an investor’s armoury.
“Armed with the twin defences of a long-term approach and the power of compound interest, investors are well prepared to survive this and the occasional future onslaughts which, as history tells us, will come along again.”
Mr Hennecke from St James’s Place recommends diversification towards longer term goals.
The disciplined investment approach would be to buy low and sell high; yet many try to follow the herd into assets that have been performing well for a while and sell off when they decline – thus achieving the opposite, he says.
“If investors have invested in the markets (including in ETFs) because they have considered their long-term goals and constructed a portfolio that reflects their risk appetite, then continue with that carefully constructed portfolio – since, historically, the best days in the stock market have a tendency to follow the largest drops – meaning panic selling can lead to only missed opportunities on the upside,” he adds.
