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Whether you have been investing for a while or are just starting out, the fluctuations of the stock market can be a frightening thing. Cash can be comforting in comparison; its value is somewhat predictable. Yet in today’s world of low-interest rates, you’d be lucky if your cash managed to beat inflation. Realistically, to generate any meaningful investment returns in 2020 you need to look beyond cash to other asset types, which inevitably carry greater risk.
How do you manage this risk, however, and what can you do to avoid panicking over the upward and downward movements of your investments (particularly your equities)? In this short guide, our financial planning team here at WMM will be sharing some practical suggestions to help you cope with market volatility when investing. We hope you find this useful, and invite you to arrange a free consultation if you’d like to discuss your own investment strategy with us.
Reach us via: 01869 331469
Remember volatility is normal
It’s important to check your emotions when looking at the past 12 months of investment performance in your portfolio. Ask yourself: is it normal for funds, stocks and similar assets to go up and down? Yes, it is. Such thinking can help you to calm down and to not panic.
Remember risk is inevitable
It might be tempting to look at an investment portfolio at a given time and think: “I would have been better off putting my money into cash, or property!” However, it’s important to remember that, ultimately, risk is involved with all aspects of money, wealth and investing. The key thing is to manage that risk well, particularly by diversifying your investments appropriately.
Yes, you could have simply held the money in cash under your bed. Yet, what if it then all got lost in a house fire or burglary? You could have put it all into a Buy To Let, but what if the property lost its value by the time you wanted to sell it, or you struggled to find tenants to pay the mortgage? Risk is involved with everything. The benefit of investing in a portfolio, however, is that you can spread that risk out over multiple investments, minimizing your exposure.
Remember that you haven’t lost anything, yet
If your investments go down due to a down market, it’s important to recognise that you haven’t actually lost anything. If you sell your assets at a low point, however, then you will lose. This is where it’s important to not impulsively pull your capital out of the markets when things are “going wrong”. Historically, the markets tend to recover.
Think of the 2008 Financial Crash as an example. Many portfolios comprising 70% stocks lost up to 35% between January 2008 and February 2009, and those who jumped out of the market would likely have lost a lot of money. Yet by February 2014, many of these portfolios had grown by over 99% since the low-point of the Crisis. By staying in the market rather than simply abandoning it when things get difficult, many investors end up better-off in the long run.
Remember your initial plan
When you first consulted your financial adviser about constructing an investment portfolio, you likely would have imagined yourself investing for 10, 20 or 30+ years. When you looked ahead at the likely journey your portfolio would take, did you honestly imagine it would simply grow without any bumps along the way?
Most investors recognise that investment growth is not simply an upward line over the years and decades. Rather, what you realistically hope to ahead is an overall moment of wealth growth, with a “jagged line” showing market volatility along the way. Economic booms and contractions are to be expected over a long investment timeframe, and your portfolio should have been designed in a manner which anticipates and accounts for such behaviour at different times.
Remember the benefits of down markets
It can be easy to see down markets simply as a disaster that your investments must simply survive. However, such times can also present rewarding opportunities which can benefit your portfolio in the longer term.
For instance, suppose you regularly commit capital to your portfolio, perhaps putting in £500 on a monthly basis. During a down market, many of the stocks in your funds will likely lose value, potentially allowing you to buy more of them for the same amount of money. Later, when the market eventually recovers, the value of many of these stocks will likely rise as well. Since you now own more stocks than you would have done if you had stopped investing during the own market, you are now, plausibly, better-off as a result of your pound-averaging strategy.
With this said, it’s important to not try and “time the markets” with your investments. Trying to buy certain stocks before they rise (or sell them before they fall) is a form of active fund management, which rarely works. Even experienced active fund managers rarely predict the markets accurately, and almost nobody can do this consistently even over a few years. Instead, rest in the long-term strategy you established at the beginning of your investment journey. You may need to engage in some portfolio adjustments once or twice a year with your financial adviser, to keep everything appropriately balanced, but it’s ill-advised to try to actively manage your investments like a day trader.
If you are interested in starting a conversation about your financial plan or investment strategy, then we’d love to hear from you. Get in touch today to arrange a free consultation with a member of our friendly team here at WMM.
Reach us via: 01869 331469