Stockmarket

What should you do if the stock market falls?

It may be the first “dip” you experience as an investor. It is not a nice thought that your investments are suddenly worth a lot less. What do you do now? Fortunately, this is not the first time that the stock market has fallen. Investment specialists have already learned a lot about the decline and rise of stock markets.

 

What impact does a stock market fall have on investors?

According to Judith Sanders, Investment Strategist at ABN AMRO, it is important to remain calm: “We all know this in theory, but it’s not easy when you see your carefully built wealth dwindle by the day. Nevertheless, it is an important starting point. Research shows that investors often make choices based on feelings and emotions, which are often irrational and wrong. An example of behavioural finance (a scientific approach to human behaviour in finance) is the “loss theory”. This theory shows that people value losses and gains differently: it turns out that the negative sense of loss can be twice as powerful as the positive sense of gain. As a result, the investor places too much emphasis on not losing money, and too little on the probability of making gains. In other words, it is extra difficult for investors to stick to their original investment plan if the markets fall for days on end. The most important thing is to recognise these pitfalls and make sure that you avoid these wrong choices as much as possible. This requires a planned and systematic way of working based on looking at investments from a distance and without emotion. This is what the experts do for Guided Investing.”

What really determines your return?

For each Profile Fund, an investment portfolio has been compiled, the aim of which is to achieve a specific return against a specific risk. This is largely based on the decisions of an international team of investment experts who meet in the ABN AMRO Investment Committee. This Committee translates events in financial markets and economic expectations into important choices in the portfolio. The choices in the portfolio are made at several levels:

The strategic and tactical investment allocation
First, we look at strategic allocation (your risk profile). This is determined on the basis of your investment goal, investment horizon and risk appetite. Based on this, we determine the most suitable combination of investment categories: how much is invested in shares, bonds, liquidities and alternative investments. Within this profile, we respond to developments in the financial markets and future expectations. We can then temporarily invest more or less in shares, bonds or liquidities within your profile. This is also known as tactical allocation. The strategic allocation, together with the tactical allocation, determine 70% of the return in the long term. The second component is the sector and regional distribution. In this part, we decide what the distribution is across regions (US/EU/emerging markets including China) and across sectors. The choices we make here determine 20% of the return in the long term.

Choice of individual shares and bonds
This is in the hands of the experts at ABN AMRO Investment Solutions who manage the ABN AMRO Profile Funds. They select the most suitable investments for the Profile Funds. The choice of individual shares and bonds determines only 10% of the return in the long term. You will find more substantive information about the fund portfolios in the monthly reports.

The importance of “staying invested”

Many of our investment choices are therefore fixed for the long term. We do not enter and exit all the time, but for the most part, stay invested. Judith Sanders explains: “Not being invested means missing the worst days, but also the best days. It is precisely those best days that have the greatest effect on your return. It is essential to invest on the right trading days. The total annual result is largely determined by this. In fact, not being invested during these days has a strong negative effect on the total return of your portfolio. Furthermore: No one can predict when the best and worst stock market days will occur in a year. That is why we advise investors to stay invested. This way you avoid missing the best days that determine your total return.”

Does it give you sleepless nights?

Hopefully this article gives you some additional insight. It is quite understandable that you lose sleep after a stock market fall and perhaps even consider quitting. However, by stopping, you will certainly not achieve your investment goal. Perhaps a Profile Fund with a lower risk will offer you a better night’s sleep. In Internet Banking, you can quickly see what would happen to your investment goal if you were to change your Profile Fund.