Geopolitical crises certainly influence the performance of global markets, especially in the short-term, as they create concerns about their potential impact on the global economy. The current geopolitical crises we are undergoing could be no exception to this and since the beginning of the year we have experienced heightened volatility in the performance of all major financial asset classes.
For investors, these types of crises definitely create uncertainty and usually give rise to a range of emotions that may lead to irrational investment behaviour.
Greed and fear are base instincts driving investment behaviour but they are greatly detrimental to your financial interests. It is not easy to remain calm in highly volatile markets. But if you do not let emotions affect your investment behaviour then you may be in a much stronger position to meet your financial goals. The graph below shows the cycle of emotions we feel as the market fluctuates.
When the stock market is rising, we feel confident and optimistic, greed starts to build up and we want to pile in. As prices reach a peak, euphoria sets in, leading us to feel that prices will just continue to rise. However, what goes up will inevitably go down.
As prices fall, we become nervous and fear starts setting in. The low point of a market cycle is often the best time to make money, but only if we stay invested. Unfortunately, the emotions of desperation and defeat often drive us to “get out” at market lows, thereby locking in losses. As the market rebounds, we become hopeful and begin to invest again, but at higher price levels than those we sold at. Some of us might feel regret and prefer to wait until the market comes back down to invest again, and end up sitting on the side lines during rising markets.
The key to navigating through crises, like the one we are facing now, and avoid riding this emotional rollercoaster is to stay disciplined and committed to your long-term investment plan. It is worth remembering that crises and subsequent market downturns are fairly common, can rarely be predicted irrespective of their cause, and are part of a normal, healthy market cycle.
In these challenging times:
- keep calm and remember that short-term volatility is a normal and natural part of investing;
- choose the most suitable investment strategy for your risk profile and stick to it;
- do not try to time the market – ignore the noise and short-term market swings.