State of the nation(s)
When L.M. Montgomery wrote in Anne of Green Gables “I’m so glad I live in a world where there are Octobers“, I think it’s fair to say she wasn’t speaking from the perspective of an investor in 2018.
2018 has been a challenging year. By the end of October most major global markets (equities, bonds and commodities, across emerging and developed markets) had suffered significant drawdowns. Even US equity markets, which looked set to continue their strong performance, reversed their 2018 gains over the course of 1 week.
What has caused this upset? Market commentators are citing tighter US monetary policy, less support from fiscal policy, the trade war with China and the autumnal winds (ok, maybe not that last one).
Here is some of the data:
We know that during a market “correction” the natural question is – What do we do now?
1. Stick to your strategy
As long-term investors it is important not to be reactive to this short-term volatility. As we look ahead there is still a lot of uncertainty around economic and political activity. This includes (but is not limited to) the ongoing Brexit negotiations, the retraction of the ECB on Italian debt purchases, the far-right outcome of the Brazilian presidential election, the list goes on… Predicting where markets will go from here is not an easy task.
However, it is worth being aware of market dislocations and the investment opportunities they create. These could allow for better alignment with your long-term objectives.
2. Reconfirm your goals and objectives
As long-term investors, it is important to take an objective-focused approach. What are you trying to achieve? How much risk can you afford to take? Are your defined objectives still appropriate?
It is likely that, as long-term investors, you will experience even more challenging market conditions in the future. So if October was unsettling for you, a lower risk budget and/or greater diversification may be appropriate going forward.
All strategic decisions should tie back to the long-term objectives and not to the short-term market movements.
3. Engage with managers on process
Your active managers have been appointed to follow a process and achieve an objective. Have they stuck to their process? Is performance in line with expectations?
Understanding a manager’s process is an important part of the manager selection process. Process drift can be hard to identify in normal market environments. However, it really comes to light through periods of market downturn.
Managers should be committed to the process they were hired to follow, during all market conditions.