“How many millionaires do you know who have become wealthy by Investing in savings accounts? I rest my case " - Robert G Allen

IT’S QUITE NATURAL TO GROW UNEASY when a market downturn begins to look like it’s here to stay. The question one is inclined to ask, “is this what a bear market looks like, and what should I consider doing now?”

“Long Term investment success is almost totally a function of how one emotionally handles declines in the equity market, as opposed to how one’s portfolio handles them” - Nick Murray

The standard definition of a bear market is when major stock indices such as the S&P 500 or ALSI drop by 20% or more from their peak. By that criterion, there have been more than 14 bear markets in the S&P 500 since 1926 and they’ve tended to last an average of less than one year, compared with the multi-year span of a typical bull market.

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher in 5, 10 and 20-years’ time” - Warren Buffet

Higher inflation, driven by rising food and energy prices, are putting consumers’ wallets under pressure. This has led to speculation that aggressive rate hikes to tame inflation will tip the US economy into recession later this year. In turn, market participants began to speculate that a weaker economy would force the fed to pause its rate hiking cycle, leading to a significant bounce in US equities.

Domestically, the month of May was extremely volatile for equity markets, with the JSE All Share Index falling nearly 9% during the previous month before staging an impressive rebound. The index finished the tumultuous month down 0.4%. Bonds faired best with a gain of 1% while property was flat.

Here's what you may want to do - and avoid doing - as you manoeuvre through a potential extended market decline.

• Avoid knee-jerk reactions

  When the market drops, it can be tempting to jump out until asset values begin climbing up again; but that can lead to costly mistakes. By selling when the market has fallen steeply, you’re at risk of locking in a permanent loss of capital.

  “The stock Market is a device to transfer wealth from the impatient to the patient” - Warren Buffet

  If you sit on the sidelines when markets become volatile, you could miss major rallies which often occur during the early stages of a recovery over a limited number of days.

• Keep investing consistently

  By investing a fixed amount of money at regular intervals regardless of market conditions, you’re more likely to be able to purchase equities at more affordable prices and potentially see the shares rise in value once the market rebounds.

  “A Market downturn does not bother us. It is an opportunity to increase our ownership of great companies with great management at good prices” - Warren Buffet

  Making regular weekly or monthly contributions to your portfolio - a strategy called Rand-cost averaging - is a form of systematic investing that can potentially offer efficiency when the market has fallen.

• Revisit your goals, risk tolerance and timeline to retirement

  During a bull market, it’s easy to forget how uncomfortable it can be when your assets decline in value, especially assets that you’re counting on to fulfil a relatively short-term goal.

  “The biggest risk of all is not taking one.” - Mellody Hobson

  If you’re retiring in a few years, it could be wise to think about dialling back risk, even if it feels as if you’re doing it after the fact. Investors with longer time horizons could typically withstand market volatility and take advantage of volatility.

• Ensure you are invested in a diversified portfolio that invests across various asset classes

  Over the course of a long bull market, your equities can appreciate or depreciate more quickly than your bond or cash holdings, throwing your portfolio out of alignment with your preferred asset allocation.

  “Diversification is the only free lunch” - Harry Markowitz

  Typically, the greater the proportion of Equity in your portfolio, the “riskier” it is because you’re less diversified through other kinds of assets that may experience less volatile price swings.

  One way for investors to help limit the effect from a market downturn is to invest in longer-term, high-quality bonds. By diversifying your portfolio more broadly with a mix of bonds and cash in addition to stocks, you may not experience the same degree of loss. Portfolio allocations are regularly reviewed and adjusted to meet the required objectives.

• Maintain perspective

  No matter how deep or long the downturn ends up being, in the past markets have bounced back. Bear markets have been seen before, and anyone looking at the historical price charts can see that those markets have recovered to grow higher than before.

  “Timing the Market is a fool’s game, whereas time in the market is your greatest natural advantage” - Nick Murray

  Investors who remain level headed and disciplined in a negative market are likely to avoid common pitfalls and potentially enjoy better times ahead. Historically, the longer you stay invested, the greater your possibility of meeting your long-term goals.

• Look at History for Facts

  “Markets always look ahead and rally when least expected and always ahead of news-flow. When markets do rally the sceptics only see glass half full scenarios and they come by many names “a dead cat bounce”, “bear market rally “and” bad news to come”. - Karl Lienbereger

  Let’s look at a few market decline corrections and how quickly markets recovered as presented by Karl Lienbereger of Coronation Asset Management at this year’s Investment Forum.

S&P Recovery Timeline

• Check in with a financial advisor

  If you feel as though your emotions are getting the better of you, consider reaching out for professional advice. An advisor can help you review your financial approach and offer investment insights that may help limit the impact that a market downturn could have on your short and long-term goals.

  “Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”

  - Morgan Housel

  And as the markets recover, your advisor can continue to help you stay on track, working with you to adjust as your priorities change over time.