Periods of market volatility can be very unsettling but ultimately they are part and parcel of investing, so you should try to hold your nerve if you can. When markets take a tumble, you might be tempted to cut your losses and sell out but you need to remember the reasons why you invested in the first place.
We take a look at what you need to consider when market conditions are turbulent.
Remember that investing always comes with risk and you may get back less than you put in.
Keep calm and carry on
As an investor you need to remember that market volatility is inevitable. Markets rarely move in a straight line, but when shares prices take a sudden turn for the worse, investors often panic and move into cash or other so-called ‘safe haven’ assets in a bid to stem their losses.
However, assuming you’re investing for the long-term - at least five years but preferably much longer – the hope is that this may provide you with enough time to recover from any market downturns. There are no guarantees though and you could still get back less than you initially invested after this time.
The reason it’s important to try to hold your nerve is that differentiating between what could be a short-lived slump, which stocks quickly recover from and a genuine crisis is very difficult. If you sell your holdings in a panic when markets fall, not only will you have crystallised any losses but you are also likely to miss out on gains when markets recover. For example, those who cashed in their investments at the height of the global financial crisis in 2008 would have missed-out on the substantial gains markets made during the subsequent years of recovery.
Bear in mind, however, that during periods of market volatility, prices could drop even further and past performance should not be seen as guide to future returns.
Don’t attempt to time the market
If everyone knew when a market will lift from the bottom, or fall from the top, we'd all be very wealthy. Attempting to guess the right time to get in or out of the market is notoriously difficult, if not impossible, which is why successful investing is often more about time spent in the market, rather than timing the market. The bottom line is no one knows which days in the market will turn out to be the worst or indeed the best. Many experts even argue that the best bargains usually arrive when chaos grips markets - as Warren Buffett once said: “Be fearful when others are greedy. Be greedy when others are fearful.”
Taking a consistent approach should help you in terms of achieving your long-term investment goals. Investing regularly, for example, can help not only to smooth out volatility over the long run but also take some of the emotion out of investing.
Find out more about the significance of spending time in the market
Although your money is still at risk, by drip-feeding money into the market on a monthly basis, you end up buying more shares when prices fall and vice versa, so you effectively pay the average price over a fixed period.
Find out more about the benefits of regular investing
Maintaining a diversified portfolio can help you weather any market storms. If all your investments are equities for example, you will be much more susceptible to market falls. As such it is highly recommended that you ensure you have a spread of investments across a variety of geographies and asset classes. Remember though if you have investments in overseas firms, you need to take into account currency risk. If the pound is weak, it will increase your returns from foreign investments but equally if sterling is strengthening the opposite will happen.
Your asset allocation should ultimately be dictated by your investment time horizon, how much risk you want to take on and what you want to achieve. The main assets investors typically split their money between are shares, bonds, cash, commodities and property. Funds are usually a good starting point, as these can enable you to spread your money across a wide range of assets and investments. Investing across a broad range of assets helps you to diversify your risk, as you are not relying on the success of one single investment.
You should also look at regularly rebalancing your portfolio, as any acute market swings - either up or down - are likely to throw your initial allocation out of sync. But no matter how effectively you diversify your investments, remember that they can still fall in value so you may get back less than you invest.
Find out more about how to build your portfolio