You may recall I recently wrote out to you and made some commentary about the potential for upcoming ‘rough seas’ as a result of rising inflation and interest rates, supply chain issues and continuing disruptions in China and Ukraine (If you want a refresh, click here).

 Unfortunately, the potential rough seas that I wrote about have arrived. Central banks around the world have been forced to increase interest rates rather aggressively in an attempt to slow down inflation increases, which is causing concern among investors and share markets. The overall concern is this – how aggressively will central banks have to act in order to get inflation under control, and what will the flow on effect of this be on business and the economy.

This, at this stage, is the great unknown, and markets will continue to act irrationally until it is known.

As was the case in March of 2020 when Covid shocked the world, markets acted irrationally until the greater impacts were known and understood, this is no different. What you may recall, however, is that once markets had seen that Covid was under control, the impacts were understood and could be accounted for, markets recovered. Aggressively.

We don’t know whether markets will recover as aggressively this time. What we do know, however, is that there has never been a time in history where markets have declined without eventually recovering to an all time high. Sometimes it takes longer than other times, but the recovery has always arrived.

The biggest impact to your financial future is the decisions made while the seas are rough, the future is unclear and the markets are irrational. This is when decisions make or break. A poor decision can cost a fortune, literally. So what can we control? Where should we focus our energy and decision making? Where are the safe harbours in this volatility?

This is where this downturn is a little different to others. There are no overly attractive safe harbours to head towards to act as a hedge to the volatility. Rising interest rates have meant that bond yields are underperforming, term deposit rates are still an unattractive prospect for the short to medium term and cash is declining in real value at the rate of inflation. All of these options are usually what would be considered as safe harbours in volatile share markets.

You’re likely reading this and thinking – ‘well, what do we do then?’ – I would respond by saying this – ships have anchors for a reason. When the seas are rough, the storms are around you and things look uncertain – drop your anchor and ride it out. Don’t rush to a marina and risk a worse storm between here and there. Don’t charge towards the storm. Drop anchor, breathe and wait for the storm to pass.

There will come a point in time, whether that is sooner or later, where markets believe that inflation is under control, and that the restriction on economic activity through rate rises will become less aggressive. The economic outlook will look more positive and the storm will be on the way past. This is when markets will commence their recovery and we will head back towards the path of growth.

Until then, however, we must trust our anchor, trust our investment philosophy and not make short term decisions that may have long term consequences.

 

Important Notice: The information provided in this post must only be considered general advice. It has been prepared without taking into account any persons individual objectives, financial situation or needs. Before acting on anything in the article, you should consider its appropriateness to you, having regard to your objectives, financial situation and overall needs.