A fully flexible way to invest
Markets can often be volatile, potentially spooking investors. We explain how to remain calm and avoid making rash decisions.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.
Stock market downturns are part and parcel of investing. So far this year stock markets around the world have been tough to say the very least, as global events have conspired to create difficult conditions. How investors react can have an impact on their investment portfolios, as much as how the markets behave.
What should you do in the face of stock market turbulence? Here are four key points to bear in mind.
1. Don’t panic and flee
Try not to succumb to panic and sell your investments when financial markets are falling. It’s tempting, perhaps with a view to getting back in when things have calmed down. But timing the market is extremely difficult.
The problem is that it’s almost impossible to tell whether economies and markets are suffering from a prolonged crisis, such as the credit crunch of 2008 and 2009, or merely a short-term wobble. So you can’t know whether markets will bounce back quickly, or remain vulnerable to further slides.
Missing just a few good days in the markets could potentially have a significant, negative effect on your long-term returns. Just bear in mind that the past performance of investments isn’t a guide to future performance and you may lose money.
2. Focus on your long-term goals
We’re programmed to buy and sell at the wrong time and tend to be affected by the prevailing mood. Good cheer is infectious, fuelling confidence and risk-taking. But it’s most common at the top of a market, when stocks have already been rising for some time, prompting investors to pile in as a cycle is peaking. Similarly, despondency is rampant at the bottom of a cycle, tempting us to sell when stocks have fallen a long way and are at bargain-basement levels.
Rather than getting caught up in these short-term swings in mood, a better approach is to accept that markets are volatile and stay focused on your long-term goals. If your goal is to fund your retirement from stocks and you have several decades to go, you could have time to recover from any big dips.
3. Continue to review your portfolio
A bout of market volatility shouldn’t get in the way of your regular portfolio review. It may be a good time to take stock and make sure you’re comfortable with your existing risk levels. Investing in risky assets, such as shares, is only suitable for those who are willing to suffer losses in the short term and can afford to leave their money tied up for at least five years.
If you decide you can’t stomach too much volatility, you could reduce some of your exposure to riskier assets, such as shares. Just bear in mind that by selling out of your holdings during periods of volatility, you could crystallise losses if prices have fallen.
Most investors have a mixture of assets in their portfolios to reflect their risk appetite and long-term goals. Different assets represent varying levels of risk and potential returns. For example, investing in equity markets has historically produced higher returns but poses a higher risk of capital losses. Investing in bond markets on the other hand, generally produces lower returns but with a lower risk of losses.
As a result, the higher the proportion of shares in your portfolio as a percentage of your overall investments, the greater the opportunity for gains. However, it would also result in a higher risk that you could lose money.
Remember that past performance shouldn’t be taken as a reliable indicator of future performance.
4. Stay diversified
Whatever your specific investment goals, it’s important to maintain a diversified portfolio. This essentially means holding a range of assets – bonds and cash as well as shares, for instance.
As well as a holding different assets, try to invest in different market segments or regions within asset classes – large as well as small stocks, for example. Exposure to a range of markets will temper the impact of turbulence in one of them.
Diversification can shield you from falls in a particular asset class, such as the slide in the value of shares so far this year. But bear in mind that no matter how diversified your holdings, your investments can still fall in value and you may get back less than you invested.
If you’re not sure a particular investment is right for you, please seek independent financial advice.
The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.
A fully flexible way to invest
A simple and tax efficient way to start investing
Boost your savings by investing up to £20,000 in our Investment (Stocks & Shares) ISA per year completely tax-free.
A tax-efficient way to save for retirement
Our award winning Self-Invested Personal Pension (Best SIPP award 2022 at the Shares Awards) is designed to help you prepare for retirement.
Let us help you build your retirement pot and make your own investment decisions.