A few ideas for how to manage your investments during a market decline

Hue Frame

Frame Funds Management

Market downturns are painful to go through and are an unavoidable part of investing.

 The way you handle periods when your investment portfolio is declining, can define the type of returns you generate over the upcoming decade.

 There are obviously other considerations when deciding when to buy and sell, and how to respond during drawdowns, some of these may be leverage, time to retirement, time required before you may need to call on your investment, and the current risk profile of your investments, to name a few.

This article aims to provide a number of simple steps to undertake during market downturns to ensure you are not one of the investors who always sell the lows by capitulating right at the last moment before a market rebound.

 As markets (and investment portfolios fall), most investors struggle to deal with the negative emotions associated with losing money. These emotions can cause investors to make rash, short-term decisions, as the immediate decision of selling (flight response) reduces the immediate pain. Unfortunately, these emotionally fuelled decisions can impact an investor’s prospects over the medium to long term.

 Most investors know this, however, do not have a simple process to follow to help navigate these periods. 

Here are a few simple ideas.

1. Reduce the risk of ruin.

a. Ensure the companies you are investing in will survive (they have enough liquidity to last a sustained downturn).

2. Reduce your investment size in companies that contain the most investment risk.

3. Reduce the frequency of monitoring your portfolio.

a. Take a medium-term view.

b. During downturns, market volatility increases, therefore your portfolio could be up or down 10% in a week.

c. You don’t get your property valued week; therefore, why would you do the same thing with your equity portfolio?

4. Plan out additional investments to capitalise on lower valuations.

a. After completing Steps 1 – 3, investors should then look to allocate further in a systematic way. (ie. monthly, quarterly, semi-annually, annually, or a predetermined technical indicator, such as when the index price is above the 200 daily moving average for instance.

5. Commitment to your investment plan for the next business cycle.

Investors must realise that during market downturns, the likelihood of you investing once and getting to the bottom is extremely low. It is far more likely, that after you have planned your additional investments, you will strategically invest further into favoured Funds/Companies and their prices may fall further.

However, as long as you have done your due diligence and have committed to your investment plan, over the medium term you should ultimately do far better.

For instance, if you had invested in the S&P500 at the start of 1987 (roughly 8 months before the ’87 crash), you would have generated an annualised return of 10.04%. Yes painful, and unenjoyable over the short term, however over the long term, by strategically investing into the best Funds and companies, you should come out much further ahead. 

This information is prepared by Frame Funds Management Pty Ltd (ACN 608 862 442) (Frame Funds, we or us) is a Corporate Authorised Representative (CAR No. 123 9068) of Primary Securities Limited (ACN 089 812 812 635) and is intended only for "wholesale clients" within the meaning of sections 761G and 761GA of the Corporations Act 2001 (Cth). This material is not intended to constitute advertising or advice (including legal, tax or investment advice) of any kind. These materials are not to be distributed to any person who does not qualify as a wholesale client and must not be copied, reproduced, published, disclosed or passed to any other person at any time without the prior written consent of Frame Funds. Primary Securities Ltd (ACN 089 812 635 635, AFSL 224 107) is the Trustee of, and issuer of units in, the Frame Futures Fund and the Frame Long Short Australian Equity Fund (Funds). In deciding whether to acquire, or to continue to hold, units in the Fund please read the current Information Memorandum available from Frame Funds. Past performance of the Funds is not a reliable indicator of future performance. The value of an investment in the Funds may rise or fall. Returns are not guaranteed by any person. Total returns are calculated before tax and after ongoing management costs. In preparing this information, we have not considered your investment objectives, financial situation or personal circumstances and therefore the Funds may not be suitable for you. Neither Frame Funds, Primary Securities Ltd, nor any of their respective related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained in this publication or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this material. Any rates of return, forecasts or estimates contained in this publication are not guaranteed. The content of this publication is current as at the date of its publication and is subject to change at any time. It does not reflect any events or changes in circumstances occurring after the date of publication.

Hue Frame
Founder & Portfolio Manager
Frame Funds Management

Hue Frame is the founder of Frame Funds Management and Portfolio Manager for the Frame Futures Fund and Co-Portfolio of the Frame Long Short Australian Equity Fund.

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