A fall in the value of your investments might make you feel uneasy, especially if you have only been investing for a short time. It can be tempting to withdraw your funds or change your investments to prevent further losses occurring.
However, volatility is a part of investing. The markets fluctuate on a daily basis, and usually experience a significant drop every few years. This is easier to cope with if you know what to expect.
The tips below will help you stay calm during periods of volatility.
Keep enough assets in cash
When your investments fall in value, it is only a ‘real’ loss if you withdraw your money. Markets usually recover fairly quickly after a dip, which means that if you withdraw your capital, you could miss out on future growth.
Having a cash buffer is essential when investing. You should keep an emergency reserve of at least six months’ expenditure, as this avoids the need to encash any investments at short notice and at potentially un-optimal times. Additionally, if you think that you will need money in the next couple of years, for example to fund retirement, it is a good idea to keep the required money in cash to avoid market volatility from affecting your capital.
The minimum timescale you should consider investing for is five years. This is usually enough time to smooth out any bumps in the market. Having a strong cash reserve could give you the confidence to remain invested and help you avoid worrying about short term dips in your investments.
Don’t doubt your plan
As mentioned, investing is a long-term commitment. While the minimum timeframe is five years, a good investment strategy will look at least fifteen years ahead.
Investing successfully relies on understanding a number of key principles:
- Diversify your investments across a wide range of asset classes, sectors, and world regions.
- Take a sensible amount of risk. Equities offer the best chance of long-term returns but are also likely to be the most volatile asset class over shorter periods.
- Avoid high costs or gimmicky financial products.
These principles do not change as a result of market volatility. It is in fact assumed that markets will be volatile at times. Trying to react to events or time the market is usually futile and can leave you in a worse position compared to remaining invested for a longer time.
Sticking to the plan and riding out the volatility offers the best chance of long-term success.
Stay informed – within reason
Everyone has an opinion about world events and how they might impact investments. If you read the financial press, you will be overwhelmed with speculation and alleged 'stock tips’.
It is sensible to keep up with current world affairs and understand how this may affect your investments. But this doesn’t mean you need to act on every bit of news.
A key point to bear in mind is that the stock market is not only based on the real value of underlying companies, but also on how investors expect them to perform. This means that if you attempt to hedge your position based on a piece of news you have heard, chances are that you are not alone. If everyone has the same idea and invests similarly, the potential advantage may be affected. Markets also move too quickly for short-term judgment calls to be effective.
It can also be counterproductive to keep too close an eye on your own investments. That is why it is a great idea to review your investments at least once a year. Reviewing them every day can be frustrating, time-consuming, and not very useful in the grand scheme of your time-scale.
Try not to make emotional decisions
No one wants to lose money, and it is a natural instinct to want to take money out when the markets are falling. The pain and regret of experiencing a loss in your fund value are said to stimulate stronger emotions than when you make a gain.
Humans are also inclined to follow others and seek evidence that supports a decision they have already made. Thinking like this and following your emotions could result in you deviating from your plan and ultimately making costly mistakes. Sticking to your investment proposal during volatility is the best option.
Sometimes it can help to take advice from an objective third party. A financial adviser can support you to make better financial decisions and help you avoid emotional decisions due to short-term underperformance.
Remember this will pass
If you look at any major market index over the past twenty or thirty years, you will see a number of peaks and troughs. Over the past twenty years, we have seen a tech bubble, a global financial crisis, and a pandemic, which have all caused the markets to fall substantially.
But crucially, despite the ups and downs, the markets have continued to move in an upward direction. If you invested 20 years ago and simply let the market run its course, you would be far better off than if you had tried to time every investment perfectly.
You may also notice that when markets drop, the subsequent ‘bounce’ usually results in them being in a better position than prior to the drop. Investments don’t rise in a straight line – we rely on the ups and downs to produce longer-term growth.
History tells us that sticking to the plan, remaining invested and avoiding emotional judgment calls is the best way to achieve your investment goals.
Please do not hesitate to contact a member of the team to find out more about investment planning.