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What To Do When Markets Bounce Back -- Don't Let 'Emotional Baggage' Keep You Out Of The Equities Market

Contributor:
Fuseworks Media
Fuseworks Media
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14 OCTOBER 2008 - Recent global events and ongoing market volatility has caused heightened anxiety for investors. Weary of asking 'Have we reached the bottom yet?" - investors want to know when the recovery will come, and what to do when it does.

Russell Investments has created a comprehensive set of online resources to help clients navigate treacherous markets. In the current edition of Russell's Investor series, entitled 'When markets bounce back', Director of Superannuation Steve Schubert says investors who give up on equities now risk missing a recovery that could help them recoup some of their current market losses.

"Be warned - when equity markets recover...emotional investors will be left with a portfolio of defensive assets and a truckload of regret.

"Russell believes that, while natural for both professionals and individuals to be fearful in volatile markets, it is important that investors continue to maintain a disciplined financial approach to help minimise losses during market downturns and ensure readiness for the inevitable upswing,"

Mr Schubert said. In the last few years, many 'emotional investors' who traditionally invested in more defensive assets (such as bonds and cash), transferred money over to equities, blindly attracted to the apparent returns without considering the associated risks.

When equity markets collapsed this year, these emotional investors started to realise that markets could go down as well as up. Many investors have also recently held back from investing in equity markets in recent months, because of rampant uncertainty and a seemingly never ending run of negative news of corporate failures.

However, when equity markets recover (which history shows they invariably do) these same 'emotional investors' will miss out on potentially better returns, because they are overly invested in more defensive assets. Mr Schubert pointed to several past scenarios where markets 'bounced' after major slumps.

For example in 1983 the Australian equities market bounced a whopping 66.8% after negative returns in 1981 and 1982.

"In extreme market conditions such as these, it is easy to let emotions trump patience and discipline. Investors who overweight their portfolios too much in a certain asset class, such as bonds over equities, are trying to time the market and adding risk to their portfolios.

"It is important to remember that some of the highest returns are experienced suddenly in an oversold, overshot market," concluded Mr Schubert.

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