Market volatility can be nerve-wracking for even the most experienced of investors but making knee-jerk reactions may be the worst thing you could do.
Here, we look at five dos and don’ts during periods of market turbulence.
Remember, we don’t offer advice, so if you’re unsure where to invest or how to manage your investments when markets are volatile, seek professional financial advice. Bear in mind too that however you react to falling markets, there’s still the risk you could get back less than you put in.
DO remember why you’re investing
When markets are choppy, think about the reasons you invested in the first place, and your investment timeframe. Focusing on the long-term and your financial objectives is one way to prevent hasty decisions.
Learn about staying focused in turbulent markets
Panicking when the value of your investment falls could lead you to sell, turning paper losses into real ones. It’s important not to get into the habit of selling investments every time they experience a dip as doing nothing is usually a better option. That’s because the longer you’re prepared to stay invested, the greater the chance your investments will yield positive returns, although it’s important to remember there are no guarantees.
DO make sure you have an emergency fund
Always make sure you have a cash buffer in place that you can use as a rainy-day fund, or to dip into if there’s an emergency. Investing is only suitable for longer-term financial goals, so you’ll need to keep some cash savings readily available for any short-term plans if you want to avoid being forced to sell investments at the wrong time.
Find out more about the importance of an emergency fund and making sure your finances are in order
DON’T be impatient
Seeking immediate investment returns rather than focusing on the long-term can lead you to make the wrong decisions at the wrong time and to trade more frequently, increasing your transaction costs. Remember that investments should be held for at least five years, but preferably longer, hopefully giving your money time to recover from any setbacks.
Find out more about the cost of impatience
DO try to see the positives
Falling markets may be stressful, but try to see them as an inevitable part of your investing journey, rather than a reason to sell. Remember that if you’re out of the market you might protect yourself against losses but you could miss out on gains while you’re waiting for things to stabilise.
DON’T follow the herd
When markets drop it’s often tempting to do what everyone else is doing. That means if everyone you speak to is panic-selling, you might decide to do the same. Rather than listening to market noise, however, take a disciplined approach to your investments and remember that there’s no ‘one size fits all’ approach.
Read more about keeping calm during turbulent times
DO remember that some volatility is to be expected
Market swings are unsettling, but they are part and parcel of investing. Adopting a buy-and-hold investment approach is one way to ensure you stay invested throughout market ups and downs, reducing the risk of missing any of the best days, and keeping trading costs to a minimum. Of course, there are no guarantees that you’ll be rewarded for sitting tight, so you must be prepared to accept the fact you could still lose money in the end.
DON’T ignore the benefits of regular investing
One of the things many investors fear most is investing a lump sum only for markets to fall soon afterwards. By drip feeding your money into an investment over a period of time, you invest across a range of prices. So, you effectively pay the average price over a fixed period, which can help smooth out market volatility.
Find out more about the benefits of regular investing
DO make sure your portfolio is diversified
Spreading your money across a range of different asset classes means that if one or more of your investments rise you will benefit but, if they fall, there should be a degree of protection because, hopefully, some of your other holdings in different asset classes will be going up in value.
Discover why diversification matters
DON’T forget to rebalance when you need to
Although you shouldn’t tinker with your investments too often, market movements could mean that your investment portfolio no longer matches your risk appetite, investment time frame or goals, and your asset allocation may need reviewing or rebalancing. It’s therefore important to monitor your portfolio every few months so you can make sure it’s still on track.
Learn about the importance of managing your portfolio