It’s very possible that all of our current efforts around the world to contain this virus will lead to a recession (at least technically) in the near future. It’s also true that government stimulus programs aimed at providing a cushion and protecting the economy and its workers, will also influence how long a recession might last. At the time of writing this article, major stock markets had responded positively to stimulus announcements.

One thing is for sure: nearly no-one will remain unaffected from the current decline in world stock markets.

The key question many are asking today is whether the recovery from a such a downturn will be rapid, or take longer to materialise.

If you are asking the same question, and one of your concerns is your savings and investments, what can you do in times of stock market turmoil such as these?

Here are my 5 suggestions for dealing with stock market turmoil and volatility, today:

Tip 1: Take notice of your own level of concern or fears

When you hear or read about falling stock markets locally or globally, does the news trouble you? Are you anxious, or are you calm?

Your level of concern is clearly influenced by your current financial situation and your short-term plans, and perhaps immediate changes in your budget. Aside from this reality, your level of concern is also determined by your appetite for risk (or your risk profile), and your investment time horizon.

The level of your concern could be a clear indicator about whether your investments and pensions are on the right track. In fact this could be a moment to ‘sanity check’ whether your attitude to risk actually matches how you are investing!

Are your investments and/or your pension plans reflective of your approach to risk and the possibility of losses in your portfolio for a period of time ? Are your expectations consistent with your investing strategy ? Does your strategy actually match your lifestyle needs and plans and your working situation?

These are good questions to explore with your financial planner. A professional approach will help tailor a strategy to meet your goals as well as possible, taking into account your risk approach and most importantly a strategy to help control the magnitude of negative returns by selecting a mix of different types of investments which can assist to reduce the risk to your portfolio as a whole.

Tip 2: Remind yourself of the time-horizon in which your investments are working.

Are you investing for the long-term, or the short-term?

If you have a short-term goal, then clearly you can expect some anxiety will arise when markets fall more than a few percent. Generally speaking, most stock market investments and private pension savings are long-term investments, designed to outlast the peaks and troughs of the market over time.

The longer your investment horizon (“I don’t need this money for 10 years or more”, for example) the more you are likely to appreciate there will be ups and downs in the market, and the less concern or anxiety you will feel about short-term stock market corrections. However corrections or declines in the market are appropriate moments to review your strategy and approach (see below).

Tip 3: Take heed in the (stock market correction) lessons of the past.

While they are not predictions or portents of the future, it’s useful to be a little informed about how stock market corrections have behaved in the past.

A stock market correction is usually defined as a drop of 10% or greater from the most recent peak. Corrections do occur on average every 8-12 months, and recovery from a correction takes on average 3-4 months.

A market fall beyond 20% (which can be described as a bear market) usually takes longer to recover. According to Fidelity, the Standard & Poor’s 500 index since 1920 has experienced a 20% or more plunge every seven years. (the last one was 2008). Bear markets have lasted 14.5 months on average and have taken two years to recover on average (according to Goldman Sachs and CNBC research).

This current downturn certainly feels different, as it’s not triggered by ‘pure economic’ factors or a fall in company earnings, or a debt crisis, but by a force of nature, an unpredictable virus that is changing living habits (or lifestyles) and especially work practices, instantly. And the forced changes and accompanying fears are creating some havoc. What experts are trying to work out is whether a recovery could be quicker, since this downturn is so unusually created, or if in fact it will resemble bear markets of the past. There are signs the large stimulus actions taking place within major economies can reassure the market to some degree.

Tip 4: Understand how difficult and dangerous it is to attempt to avoid losses in the short-term and time the market. 

There’s a Wall street cliché, ‘never catch a falling knife’, which stands to warn against those trying to move their money around to participate in only the ups in the markets, and avoid the downs.

Sharemarket data typically shows that people tend to transact at the wrong times causing even larger losses.  Resist the urge to trade and profit from corrections. It’s much more appropriate to revisit your overall strategy, review your time horizon, your risk approach and objectives for the future. Have they changed? (and not changed solely because the market is falling or correcting)

Tip 5: Take the opportunity to review your investment structure, strategy and retirement planning. (note: your pension(s) are also your investments). 

Is your investment portfolio or your pension, and it’s legal structure, fit for purpose? Is it cost and tax efficient, and not creating barriers to slow down progress toward your goals and objectives?

Take a look at the structure of your investments when it comes to managing your wealth as effectively as possible. Two important factors of wealth management include managing your costs, and ensuring your investment structure is tax efficient.

Reviewing costs

When portfolios and savings are declining in value for a period of time (or not increasing in value) it’s important to review how costs are being deducted from your investments and pensions. Are the costs being deducted easy to see? Are they reasonable and competitive in the market, and do you know the quantum of every cost levied on your portfolio? In the days when the stock market is rising we can often overlook costs, and we don’t focus on it. However in days like these, when your investments are under pressure, removing unnecessary costs (whilst still maintaining relevant and valuable advice) is going to help reduce the degree of loss in value over time, and help prevent costs from being a drag on your investments.

Investment structure

When markets are falling, or not rising as they once were, aside from realising that stock markets will rise and fall by their very nature, it’s an appropriate time to review your investment approach, and be sure it reflects your current situation and goals, your attitude to risk while investing (current risk profile) and your time horizon.

When we think about tax effectiveness, is your investment or pension inadvertently taxable in 2 countries? Are you aware of what wealth and death taxes might apply to your investments, both in the country in which you are resident, and the country of the investment, or of your domicile.

Once again, these are all good items to explore with your financial planner. It’s important to know that stock market corrections are a necessary and normal part of stock market activity. Investments simply do not grow in a linear fashion, and they often experience considerable volatility. Ultimately you can control to some extent the negative impacts of market corrections, by carefully selecting the mix of investments you own.

At the end of the day feeling sad or depressed about falls in the market and the effect on your portfolio is quite normal, and behavioural analysts refer to this common human trait as ‘loss aversion’, the sinking feeling of losing something we own (or think we own), which as it tuns out, is a much stronger feeling than the happiness we feel from a growing portfolio!

In essence, it’s probably wiser and more useful to focus on what you expect for the future, and attend to fine-tuning a strategy to meet your goals based upon what you expect from the market over the longer term, regardless of how your portfolio balance looks today.

To arrange a confidential review of your investment and pension arrangements and assess their suitability for you as an Italian resident, please send an email to [email protected]