As an investor, it can be hard not to lose your nerve in volatile markets, especially if you’re a novice.
High inflation, rising interest rates, and the economic uncertainty created at least in part by the war in Ukraine have led to an uncertain market for investors in 2023.
According to research published in Money Marketing, more than a third of financial advisers have seen clients abandon their investment plans in favour of a more cautious approach.
During these times, it’s important to remember that market volatility is inevitable. Markets will move up and down in the short term. That’s why experienced investors typically adopt a long-term strategy, rather than being swayed by short-term fluctuations.
To build a strong investment portfolio, it can be beneficial to understand volatile markets and develop strategies for weathering the storm and staying positive.
Focus on your long-term goals
If the value of your portfolio drops, remind yourself that it’s unlikely that a downturn will last indefinitely.
Historically, the global economy has faced many challenges, from war to deep recession. Markets may fall in response to these changes, sometimes dramatically, but they typically recover over the long term.
By holding your nerve when faced with short-term fluctuations and taking a long-term view, you could avoid the potentially damaging impact of volatility on your portfolio.
However, simply buying and holding stock for years may not be enough to achieve your investment goals. You need to develop a robust investment strategy as well as have the confidence to remain calm and stay the course if and when the market slows.
Diversify to manage risk
Investing in a single category of investment or “asset class” could leave you vulnerable to sudden downturns in the market.
Conversely, spreading your money between different types of asset class could help limit losses in your portfolio because each will perform differently at different times. Some may fall in value while others make gains.
Diversifying across a range of asset classes, and across geographical areas, could help to protect your portfolio during periods of volatility.
As an example, JP Morgan reports that, in 2020, the UK FTSE All-Share index fell by 9.8%. So, if you’d only invested in the UK, the value of your portfolio would likely have fallen.
Meanwhile, the US S&P 500 index rose in value by 18.4% in the same year. So, if you’d diversified your portfolio over these two markets, gains made in the US could have offset some or all of the losses experienced in the UK.
Rebalance your investments
Managing the level of risk in your portfolio is an important part of investing.
Play it too safe by focusing solely on low-risk investments and you may struggle to achieve the level of return you want. Taking on excessive risk could result in losses that you can ill afford.
It’s important to remember that the risk level of your investments is not static. As the market fluctuates and the assets in your portfolio increase or decrease in value, the level of risk changes too.
For example, if equity markets rise in value, you may find that a greater proportion of your overall portfolio is invested in shares. You may then need to rebalance your portfolio so it aligns with your risk profile.
So, when the market is volatile, it’s worth reviewing and rebalancing the level of risk in your portfolio to make sure that it is still right for you.
Avoid obsessively checking your investments
When markets are uncertain, it can be tempting to frequently check your portfolio. But this could damage both your financial and emotional wellbeing.
Focusing on short-term fluctuations may lead to knee-jerk responses that could hinder your progress towards your goals. For example, rushing to sell shares that have fallen in value could lock in a loss and remove any chance of your investment recovering in value when markets improve.
Letting your emotions rule can lead to decisions that compromise your progress toward your financial goals.
If you’re feeling panicked by a volatile market, a financial planner can act as an objective sounding board and help you to make decisions based on the true level of risk you’re exposed to.
Remind yourself that investing beats cash savings
Even when interest rates are high, returns from standard cash savings accounts can fail to keep up with inflation. This can mean that savings lose value in real terms.
According to research by This is Money, not a single UK savings account has managed to match or better inflation between 2021 and 2023.
Investing your money gives you greater potential to “beat” inflation over time.
However, you need to understand the market and develop an investment strategy that helps you achieve your financial goals.
Get in touch
If you want to learn more about developing a robust investment portfolio that aligns with your long-term financial goals, get in touch.
Please email us at firstname.lastname@example.org or call 0345 505 3500.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.