Political and economic turbulence have dominated headlines in recent times. From Brexit to Trump and the trade war with China, the potential political and economic challenges of these events can bring uncertainty to investors and lead some of us to make hasty decisions that could see us miss out.
Investing in volatile times? Keep calm and carry on
However, when it comes to protecting our investments and maximising opportunity during volatile times, there are things we must consider if we are to make the most of our money.
The risk factor
During any period of volatility, thinking about our reasons for investing and what we ultimately plan to do with our money is an important first step to take.
When we’re young and saving for the future, we might have a bit more wiggle room to be more adventurous with our money. By investing over the long-term, it’s more likely that we’ll ride out short-term volatility and have access to potential market returns.
However, if we’re looking to access our investments sooner rather than later the impact of volatility in the near-term can be much more severe.
Just as we might reconsider our plans when the forecast shows stormy weather, volatile times should act as a chance to look again at where we’re invested and whether it still fits our long-term needs. After all, while at first, we may have been happy to take bigger risks, over the years our ability or willingness to take on risk might have changed.
Are we happy with where our money is invested? Does the risk outweigh the potential reward in the future? Have we balanced the risk to fit our plans? Or are we in a position to taketaking advantage of growth in the market as much as we would like? These are all questions we should be asking ourselves when volatility looms on the horizon.when a volatile patch comes alongin volatile times. Making sure our appetite for risk matches where and how our money is invested can help to limit the potential for any shocks or disappointment down the line.
From one basket to many
Once we’ve re-evaluated how much risk we’re willing to be exposed to, we might want to consider readjusting where we’ve invested. That could mean moving our cash away from potentially riskier assets like shares and spreading our money across different investments.
If we’re looking to benefit from volatility and staying invested for the long-term, it’s worth thinking about multi-asset funds that spread investments across sectors, countries and different asset types such as shares, bonds, property and cash to balance the risk. It’s the investment equivalent of not putting all our eggs in one basket, so if one part of the market or region experiences a bit of volatility, the money we’ve invested in other markets or assets is somewhat shielded from the impact of any fall.
Fight the flight
Naturally, when times are tough, human instinct can prompt us to retreat instead of dealing with any challenges head-on. As in our day-to-day lives, we’ll have a choice to fight or flight, but we shouldn’t see volatility as a reason to make kneejerk reactions.
As investors, we have a tendency to panic and think pre-emptively about what might happen to the market. Once a point of view takes hold, the momentum can be strong enough to ensure that view is factored ‘in the price’, even if the final result is just a blip or a rallying market.
One of the biggest lessons I’ve learnt in my career is that there is always a time when we should fight the flight. It can be hard to ignore our natural reactions or avoid following the herd, but fighting these instincts can actually help us to stay clear of the most costly error – selling low and buying high.
If we immediately act to sell our investments during a period of volatility, we could end up missing out on any gains after that fall. Stocks and shares can so often rally after a jittery market, even exceeding the previous high and sometimes in a single day.
Just last year equity markets were facing their worst performance in a decade. UK equity funds, in particular, faced a challenging time with investors increasingly pulling out their money, but after all the panic there is now a buying opportunity as the market starts to rally. The same story can be seen with global equities following the global financial crisis.
And while selling up shop after a fall in the market doesn’t just mean we’re taking a loss and missing out on growth, if we want to buy back in, we might have to do so at a much higher price. We also lose the benefits of compounding when companies payout to investors too. Re-investing these payouts, or dividends, year after year can dramatically boost the money we earn from our portfolios over the long term.
Little and often
There are other potential benefits to staying invested too. By investing little and regularly during volatile times, rather than with a lump sum, we could even end up buying more shares at cheaper prices when the market does experience a fall.
For example, investing a lump sum of £1200 in shares worth £1 each would buy us 1200 shares. However, during a 12-month period we instead invest £100 a month and by May the share value falls to £0.81, rising in June to £0.88 and in July to £0.92. Using our regular investment of £100, we could buy 123 shares in May, 113 shares in June and 108 shares in July. Even if the share price returned to £1 by August, at the end of the 12-month period we would have bought 1244 shares, compared to the 1200 we would have if we had invested with a lump sum. Of course, this particular strategy works best in a volatile market where share prices fluctuate, and as with any investments we make, the value may go up or down.
We shouldn’t see volatility as simply a reason to pull out our money. As with life, markets are unpredictable, and the worries they throw at us are often quickly forgotten about when we consider all that we’ve gained in the long run. Just keep calm and stay invested!
Please remember that the value of your investment and any income from it is not guaranteed, and can fall as well as rise. You may get back less than you invest.
Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.