Global equities recently had their worst week since the financial crisis of 2008 but Pictet Asset Management’s Shaniel Ramjee believes that changing portfolios too much in response could be the worst decision an investor makes.

Last week saw stock markets around the global slump after investors fretted about the spread of coronavirus in locations such as Italy, South Korea and Iran. This impact funds as well, as shown in the chart below.

Ramjee, senior investment manager in Pictet’s multi-asset strategies team, noted that many investors become disorientated when such sharp falls are seen and might feel pressured to adjust their portfolios.

Performance of fund sectors between 24 Feb and 28 Feb 2020

Source: FE Analytics

However, he argued that successful investing demands people control the urge to take evasive action at the first sign of trouble.

“Investors should never forget that the secret to capital growth is compounding – the snowball effect of reinvesting your returns to generate future returns,” the strategist said.

“To benefit from the compounding effect, it is essential that investors maintain a long-term perspective at all times. Making snap decisions in response to one piece of data carries significant risks.”

Below, Ramjee highlights four basic strategies that investors can follow when facing volatile market conditions.

Stay diversified

Being diversified means that investors hold a wide spread of assets and avoid ‘putting all their eggs in one basket’.

Allocating too much of a portfolio to a single asset can have significant consequences, especially when markets act in a more unpredictable fashion during times of heightened uncertainty.

Investors could find that they have a bias to areas worst affected by the sell-off, heightening their losses.

“It’s a rule that investors should follow at all times but maintaining a diverse range of investments during periods of market volatility is not only advisable – it’s necessary,” said Ramjee.

“History tells us that diversified portfolios are better able to withstand the negative effects of volatile markets than concentrated ones.”

Maintain a long-term perspective

One popular adage in investing is that ‘it’s time in the market that’s important, not trying to time the market’.

This means that investors should avoid trying to predict the top or bottom of market – selling to avoid further losses then buying back in when they start to rise again – as this incredibly difficult to do.

Instead, the default approach should to be maintain positions and ride out any volatility, while remembering that stocks will tend to rise over the long term.

The below table shows the duration and impact of several bear markets in the US, followed by how long the following bull market was and how long it lasted.

Bull and bear markets of the past 40 years: S&P 500

Source: Pictet, Bloomberg, Standard & Poor's, JP Morgan. Data in price return terms, covering 31 Dec 1972 to 31 Dec 2019

“In addition to building a diversified portfolio, keeping a long-term perspective is essential when markets stumble,” Ramjee explained. “Experience shows that crises and volatility are temporary, and that stocks eventually recover.”

Investing regularly helps

Because even professional investors find it difficult, if not impossible, to accurately time the market, investors should not be putting money into the market sporadically.

Drip-feeding money into a portfolio – or regularly investing smaller sums rather than larger but fewer lump sums – is a much-recommended strategy. One of the main benefits of this approach is ‘pound-cost averaging’.

Ramjee said: “Investing regularly in fixed amounts is a potentially better approach to take over the long run. Investors who do this find they buy more shares at lower prices and fewer shares at higher prices.”

Bonds aren’t the only answer

Government bonds are one of the best-known safe havens in times of market stress thanks to their inverse correlation with stock markets.

This was seen last week. While the MSCI World was down 9.54 per cent in total return terms, the Bloomberg Barclays Global Treasury index rose 3.56 per cent.

Performance of indices between 24 Feb and 28 Feb 2020

Source: FE Analytics

However, Ramjee reminded investors that bonds are “not the only option” in times like this.

“Instead of making wholesale changes to portfolios, investors could consider retaining equities but via group of stocks that have proven to be resilient during periods of high market volatility, such as those represented in the MSCI Low Volatility index,” he said.

“Other commonly used tools to diversify a portfolio include alternative investments such as property or gold.”