If US trade war has made investing in financial markets feel like a trip to the dentist, it’s best to grin and bear it

Hannah Anderson says a pro-risk tilt in portfolios is still appropriate, despite recent volatility, given that market fundamentals remain solid

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A dentist performs a procedure during a free clinic in Oakland, California, in March 2012. Investors should take their cue from dental advice on regular maintenance and tailor their portfolios to the changing market conditions. Photo: Getty Images/AFP

Published: 1:00pm, 13 Jul 2018Updated: 10:32pm, 13 Jul 2018

I make terrible decisions when I’m anxious. A trip to the dentist fills me with dread. Seeing an upcoming appointment, I am more likely to cancel than just get it over with. This provides temporary peace of mind, but negatively has an effect on my long-term health.

Right now, investors are anxious – anxious about US policy changes, about the global business cycle, about market sentiment, and again, anxious about stability in China. But they should realise that taking a deep breath and going through some momentary discomfort is the better decision for their long-term health.

Despite recent volatility, a pro-risk tilt in portfolios is still appropriate. Fundamentals remain solid in most markets, judicious investor reactions to recent headlines are encouraging and the forthcoming earnings’ season should validate the views of equity optimists.

One of the biggest sources of volatility for global markets in recent months has been US actions on trade. Markets have grown increasingly anxious about how protectionism will reverberate through markets.

Investors should be aware it will take markets some time to fully and appropriately price in the impact of these policies – which is one reason that the reaction immediately after an announcement has borne little resemblance to market behaviour in the following days.

Over the past 18 months, a protectionist trade announcement has corresponded to a 0.3 per cent fall in the S&P 500 total return on the day of announcement, followed by a 1 percentage point cumulative recovery over the subsequent five trading days.