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Weathering Uncertain Markets

Key principles for lifetime investing

Discipline is vital to weathering uncertainty, but it is easier said than done. Managing an investment portfolio for the long term is partly a test of willpower. Your emotions and instincts will be urging you to react to short-term news and market movements, even though your investment goals might be far away.

By following some simple rules you can train yourself to prepare for whatever the future throws at you. Recent market and macroeconomic shocks may test your resolve but by following the principles below you can position your portfolio to better weather uncertain markets.

Act on insight, not instinct

Markets do not necessarily react to events in a rational manner. Boom and bust cycles, together with asset bubbles and crashes, have been a feature of investing as long as markets have existed.

The reason is obvious: investors are human beings, and their decisions are often driven by emotional biases rather than careful thinking. While most investors understand the theory of “buying low, selling high”, many people don’t put it into practice and tend to fear losses more than missing out on potential gains, even if the end return would be the same.

This means your instincts might urge you to get out of the market at the bottom of a downturn, to avoid the possibility of further losses. But if you do this you run the risk of selling low and missing out on some of the best value opportunities.

Growth of USD1,000 in MSCI Asia ex-Japan, 2012 – 2022

Chart of market performance over time showing falls and rallies

Source: Bloomberg as at 31 May 2022, rebased to 1000 as at 31 May 2012. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results..

Diversify to manage risk

“Don’t put all your eggs in one basket” is equally good risk management advice for grocery shopping and investing. Not every asset class will be increasing (or decreasing) in value at the same time, so investing across a wide variety of assets should help smooth returns over time.

Assets tend to move together during periods of market stress, in part owing to a common instinctual urge to sell to avoid further losses. So a crucial part of weathering market stress is ensuring you have exposure to a mix of assets, including alternatives such as commodities, real estate and non-traditional investment funds.

Annual performance of selected asset classes (in USD)

Table of annual performance of selected asset classes

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.
Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, 1 June 2022.
Notes: The table shows annual index total returns (income or dividends reinvested) in U.S. dollars, indices are unmanaged and therefore not subject to fees. 2022 shows year to 31 May 2022. Indexes or prices used are: U.S. equities - MSCI USA Index, China equities - MSCI China Index, Emerging debt - JP Morgan Emerging Market Bond Index (EMBI) Global Composite, High yield - Bloomberg Barclays Global High Yield Index, Investment Grade (IG) credit - Barclays Global Corporate Credit Index, Commodities - Commodity Research Bureau (CRB) Index, REITs - S&P Global Real Estate Investment Trust (REIT) Index

True cost of cash

In times of uncertainty your instinct might be to convert your investments into cash. But the longer you hold cash, the less it can actually buy when inflation is taken into account.

Implied purchasing power of $1,000 held in cash in specified currency in 2012 terms

Chart of inflationary impact on cash deposits in various currencies over time

Source: BlackRock Investment Institute, May 2022. For illustrative purposes only.

Invest with discipline

One way to conquer your emotions and remove the temptation to jump in and out of the market is to set aside a defined sum to invest at regular intervals, usually once a month. This allows you to budget effectively and can smooth the impact of price volatility, since you will buy more shares or fund units when prices are low and fewer when prices are high. This means returns are likely to be better compared to jumping in and out or investing lump sums on an ad-hoc basis.

The benefits of this “dollar cost averaging” technique can be seen in the following hypothetical examples. An investor who commits a smaller sum each month benefits when the share price declines, making the average cost per share lower.

Illustrative strategy 1: Systematically invest $1,000 per month every month for a year regardless of share price

Chart showing costs and outcomes of a regular share buying strategy

Illustrative strategy 2: Invest $12,000 as a lump sum at the beginning of the year

Chart showing costs and outcomes of making one purchase of shares per year

Source: BlackRock. The information provided is for illustrative purpose only and is not meant to represent the performance of any particular investment. Systematic investing does not guarantee a profit and does not protect against loss in declining markets. Systematic investing involves continuous investing so investors should consider their ability to make periodic payments in all market environments. Investing involve risk, including the possible loss of your entire principal. All figures are represented in USD.

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