Opportunity in volatility

04 March 2019

3 minute read

Markets are on edge as Brexit negotiations continue. Do these uncharted waters pose a threat or an opportunity for investors?

Who's this for? All investors

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.

What you’ll learn:

  • The emotional impact of market volatility.
  • Why ‘hidden gems’ could be available.
  • Why it takes experience and knowledge to find them.

Ongoing political turmoil surrounding the UK’s future relationship with the EU is hanging over markets, triggering volatility, and leaving investors understandably nervous. In uncharted waters like these, does the outcome pose a threat or an opportunity for investors?

Thinking about the long term

Although it might be tempting to make knee-jerk reactions when markets fall, in general, it’s a good idea to avoid trading too frequently. It’s important not to monitor your portfolio too frequently or get distracted by the daily performance of individual investments. That’s because investing is a long-term undertaking, so it’s best to avoid spending time worrying about the short-term performance of your investments and stay focused on the big picture.

What’s more, whatever your level of investment experience it’s a good idea not to be tempted to overestimate how sure-footed you are. Most of us simply don’t have the time or resources to try to ‘beat the market’ and even professional investment managers don’t always get it right.

The uncertainty around Brexit and the volatility we’re seeing can test the nerve of any investor and it’s just that sort of pressure that can lead to the temptation to pull out of investments prematurely. However, current markets may create opportunities for those with the emotional resilience to stick with investments through the ongoing turmoil.

Anxiety creates value

When times are stressful and uncertain, it’s natural for investors to worry, often excessively, about what will happen in the short term, rather than focusing on longer term opportunities.

This emotional response creates shorter time frames for investors’ thinking and this can lead them to shun investing more than if they were taking a rational long-term perspective. However, for active fund managers (those who aim to beat an index rather than track it) this can provide a chance to hunt for hidden gems at good valuations.

It can also create opportunities for more experienced and emotionally resilient investors who want to pick shares themselves.

That’s not to say markets aren’t still risky – they are – but in times of stress, markets tend to reflect not only rational risk expectations, but also the emotional anxiety of all those investors who’ve taken their eyes off their long-term goals. This means periods of volatility can be good entry points for long-term investors – it won’t be a smooth ride though.

Thinking about riskier assets

Fearful investors often turn away from risky assets as a whole, without giving enough thought to whether they’re actually high or low quality assets.

In troubled times, shares can move up and down together depending upon whether there’s a general feeling towards or away from risk. That can mean investors sell the good with the bad, without paying enough attention to long term prospects.

At times when shares are being avoided en masse, this can provide opportunities for investors with a strong appetite for risk to buy additional holdings at lower prices. In the short-term they may well continue bouncing up and down with the market as a whole, so if it’s an approach you’re considering, you’ll need to be prepared for this.

However, a basket of such shares, carefully selected, could allow you to supplement your portfolio with assets purchased at deep long-term value, at a time when most investors are more concerned about short-term emotional comfort.

Decide what’s right for you

Remember that active stock picking is only for investors who are confident that they have the time and the experience to engage in it. As always, the value of investments can fall as well as rise and you could get back less than you invest.

No matter how you choose to invest, in the short-term the post-Brexit ride is likely to be bumpy, so it’s sensible to buckle up, sit back and try to maintain your composure. If you’re not sure about the right investment approach, your outlook on risk, or what’s best for your financial ambitions, you should seek independent advice.

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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.

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