Navigating market volatility
Various events can cause market fluctuations−pandemics, shifts in government policies, crises in foreign countries, changes in economic data, and so much more. You can’t control how these forces may impact the market, but you can take steps to mitigate their impact on your investment portfolio.
Volatility is an inevitable part of investing; a necessary evil and investors must always be prepared to ride the ups and downs. Keeping everything in cash is the most secure thing to do in the short term but keeping too much in the longer term it is likely to be a poor decision.
Meeting long-term financial goals
Inflation could gradually erode its spending power. Through compounding more volatile stock market returns, and ignoring short-term noise, you give yourself a better chance of meeting long-term financial goals.
It’s often the case that the market falls more quickly than it rises, which is psychologically challenging. It’s particularly bad luck if you have just invested a lump sum, but there is consolation from the fact that time spent in the market is far more important than timing the market over long periods, so as long as you have a long term view you shouldn’t be too concerned.
Keeping invested is often the best strategy
Selling out in fear can be the worst thing to do. Large falls can be followed by large rises, so you risk losing on both sides – selling when prices are depressed and not buying in until they have moved higher. Sadly, this is a trap that many investors fall into. Being out of the market also means you are no longer collecting – and potentially reinvesting – any income your investments are paying. In the absence of a crystal ball, keeping invested is often the best strategy, no matter how uncomfortable.
Daily monitoring during a falling market can result in an over-emotional reaction and make rational decisions difficult. If you have a well-diversified portfolio of collective investments such as unit trusts and investment trusts, as well as a strategy you are happy with, then a less regular (for instance monthly) check should be sufficient.
Right balance between risk and return
Sudden market turmoil after a calm period can reveal just how volatile certain investments in your portfolio can be. If this is a shock you weren’t prepared for it may be time to revisit whether you have too much in the most volatile assets. You could add areas to diversify to help smooth out returns, though bear in mind this may dilute the long-term potential of a higher risk portfolio and that any changes should be thoughtful and measured rather than made in haste.
When you invest in the stock market you are buying into stakes in companies. As a shareholder, you participate in the growth of the business if it does well and often receive a share of the profits through dividend payments. Sharing in the profits and growth of companies means your capital is potentially exposed to losses, but over long periods of time history shows that investors often benefit from taking these risks. Striking the right balance between risk and return is something every investor must consider and revisit periodically – it’s important that you make the most of your money, but without losing sleep over it!
This information has been prepared using all reasonable care. It is not guaranteed as to its accuracy, and it is published solely for information purposes. It is not to be construed as a solicitation or offer to buy or sell securities and does not in any way constitute investment advice.
Information based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The value of investments and income from them may go down. You may not get back the original amount invested.
Past performance is not a reliable indicator of future performance.