Investors who glance at any financial newspaper or TV channel these days and are battered by warnings of an imminent Brexit-related recession would be forgiven for putting off investing for the time being. But that would be a mistake. Why?
The simple answer is that very, very few people can predict with any great certainty when an economic downturn is going to happen. For every star of The Big Short who correctly timed the Financial Crisis, there are dozens upon dozens of famous fund managers who missed out on great returns because they were positive the Eurozone Crisis in 2010 or Chinese stock market crash of 2015 would send global markets into a tailspin.
Weathering the storm
Brexit may be different. No one has the crystal ball that would save us all many sleepless nights and much red ink our brokerage accounts. But the past tells us that there are frequently short-term shocks that may or may not cause a recession or worse. And, more often than not, the global economy and developed country stock markets prove resilient and weather that year’s given storm.
Just look at the FTSE 100. The first few days after the EU Referendum saw shares plunging across the board. And although domestic banking and real estate shares haven’t recovered, the index as a whole has surged 5% beyond its closing price on 22 June.
Investors who panicked and liquidated their holdings on the morning following the vote wouldn’t only have made paper losses, but also missed out on a huge rally.
What does that mean for investors going forward? Don’t put too much stock on this week’s global doomsday headlines. We as retail investors have no control over or significant insight into how markets at large will behave in the near term.
The best course of action is to continue buying quality companies with bright futures or simply buy an index-tracking ETF. There is of course the off chance that you’ll buy immediately before the market plunges, but sitting on the sidelines with cash forever means no returns whatsoever.
If you’re truly worried that a downturn is imminent, dollar-cost average investments over a few quarters. This technique can oftentimes help mitigate short-term volatility by spreading purchases over several months.
Stay in the game
It’s important to have skin in the game because over the long term, research has shown time and time again that the best method of ensuring decent returns is to invest in the stock market.
Avoiding buying shares of great companies now simply because the loudest voice in the TV studio is convinced that the next recession is just around the corner would mean that you’d never invest. And, unless you enjoy receiving far less than 1% interest on the cash in your brokerage account, that’s no way to save for the retirement you want.
