Major political and economic events can be nerve-wracking for investors, as uncertainty often leads to market volatility.
There have been plenty of examples of events which could have rocked markets over the last 18 months, although they have proved surprisingly resilient following Brexit, elections in France and Germany, and rising US-North Korea tensions.
Fears of significant changes can have a major impact on investor confidence, as no-one can accurately predict when there will be a market dip. Investments can fall as well as rise, and whatever steps you take to protect investments from stock market movements, you could get back less than you put in.
Here are five strategies to boost your investor confidence, and help investors take a measured approach that could potentially result in long-term profits.
Choose a spread of assets
Deciding which investments to hold within your portfolio is a personal decision, and will depend on your attitude to risk, your goals, and your time horizon. However, there are some principles that may help increase your investor confidence. These include having a wide spread of assets within your investment portfolio, such as equities, bonds, property, and cash, and ensuring your share holdings are spread across a wide range of sectors.
Investing in a range of assets across different sectors means your holdings will be diversified, so that when a stock market shock occurs, parts of your portfolio may rise to offset falls in other areas. Conversely, returns from one investment may be offset by losses in another.
For example, defensive investments, such as pharmaceuticals and food producers, may provide steady returns regardless of the performance of the stock market because, provided there is demand for them. However, even if there is demand, there are no guarantees that companies will profit. For example, some may spend too much on research and are therefore unsuccessful. Other investments may be cyclical, which means they may produce goods which aren’t essential to everyday life, such as technology companies, or car manufacturers. Cyclical investments may produce returns at particular times in the economic cycle, often faring better when the economy is doing well, and suffering when there is a downturn.
However, managing the diversification process as an individual investor can be difficult. One option is to consider a fund that does this for you. For example, alongside a wide range of funds across different sectors, Barclays’ offers Ready-made Investments, which provide a choice of funds spread across a range of assets to suit different attitudes to risk. We’re not offering advice or recommendations to select any of these funds, nor are we suggesting that Ready-made Investments are the best solution for you. There are many other options on Smart Investor that could equally or better meet your needs than the funds selected as Ready-made Investments. If you’re unsure where to invest, seek professional financial advice.
Look to the long term
Keep the old investment adage in mind: “Time in the market is more important than timing in the market.”
Focusing on the long-term by investing for at least five years, or longer, can help ensure you aren’t distracted by any short-term setbacks which could knock your confidence.
Trying to guess when the stock market may rise or fall means you risk missing out on the best days for gains, because nerves prompt you to sell at the wrong time. Investing for the long-term, at least five years but preferably longer, doesn’t mean you won’t lose money in the end, as there are no guarantees, but this strategy may help reduce the likelihood of this occurring.
Learn more about buy-and-hold investing
Consider professional management
Funds, such as unit trusts, open-ended investment companies (OEICs), and investment trusts, invest in a wide range of companies which are carefully chosen and monitored by professional fund managers.
Knowing you have an expert conducting extensive research, and making the investment decisions may help increase confidence that your fund holdings have the potential for success. Your money is spread across dozens of different shares, which is typically considered lower risk than investing in just a few.
Keep a calm head
If you feel nervous of stock market gyrations, often the worst reaction is to let your emotions dictate your investment decisions, and sell out of the market. If you are able to keep calm and stay invested during the tough times, you may, over the long term, gain returns from any recovery.
Selling during a market fall will crystallise your losses, and mean you could miss out on any potential upturn. Although, again, if markets do fall, there are no guarantees that they will fully recover.
Keeping a calm head may be helped by focusing on the reasons you picked your investments in the first place, and referring back to this when you are worried about markets falling.
Learn more about the impact of emotions on your investments
Focus on the big picture
It’s easy to feel unnerved by current economic and political uncertainty, but remember that the stock market has endured many recessions and financial crises since its creation, and gone on to make up lost ground and produce gains for plenty of - although by no means all - investors. Since the most recent global financial crisis of 2008, for example, the FTSE 100 index has recovered, reaching all-time highs this year for those who remained invested during that tumultuous period. However, the FTSE 100 took 15 years to recover from its dotcom bubble high in 1999 whilst it took 17 years for tech stocks to finally recover the losses they suffered when the bubble burst in March 2000, with the S&P 500 information technology index only breaking its record of 988.5 set that month in July of this year. Past performance should therefore never be seen as a guide to future performance.
Find out more about what investors have learnt from the financial crisis
There are no guarantees that a falling market will fully recover. Remember that no matter what strategies you take to increase your confidence when investing, there is the risk that you could get back less than you put in. If you remain unsure where to invest, seek professional financial advice.