When we invest in markets, we do it with the understanding that growth isn’t a straight line. There will be periods of growth and there will be periods of turbulence – investors just hope to experience the former more than the latter.
The fact of the matter, however, is that markets go through rough patches. Geopolitical instability, shocks like Covid-19, even extreme weather events can cause performances to slump and dealing with those downturns is what separates a great investor from the rest.
So, we’ve compiled a few tips to help you navigate market volatility. A couple of these may seem counterintuitive, but we believe they’re the best way to position yourself to not only withstand any ups and downs but also come out the other side strong.
In summary: Investing is a long-term project and reacting to short-term fluctuations can actually have a negative impact on your investments rather than a positive one. Generally, focusing on your broader goals and riding out volatility are a good option for most investors.
Stay the course
Probably the most common mistake people make when they experience market turbulence is to sell their investments. At first glance this makes sense; why keep your money in assets that are losing value?
The reality is that selling your assets only cements your losses. Those that sell miss out on any recovery that comes after the dip. There’s no guarantee that assets will recover their value, but selling when they’re down only ensures that you make a loss on that investment.
This chart shows the impact of disinvesting during volatile periods. It shows the performance of an investor who stayed invested during downturns and rode the dip, against an investor who disinvested during every 10% drop, only to reinvest once the market had recovered.
You might have heard the phrase time in the market beats timing the market and it’s not just a cliche, there’s plenty of evidence to support the idea. As you can see, missing out on recovery periods as a result of selling can have a significant impact on a portfolio’s value over time.
We advocate long-term investing, which means avoiding knee-jerk decisions, sticking to the broader investment plan and seeing short term shocks for what they are.
Try little-and-often investing
A lot of people worry about their timing when it comes to investing. They naturally want to avoid buying when prices are too high and avoid buying just before a fall in markets.
We’ve said before that the best time to invest is almost always ‘now’ – this relates to time being your most valuable asset as an investor – but this comes with a couple of caveats. The most important is that you can avoid any worries about market timing by investing little-and-often to stagger your market entry.
Put simply, if you put £20 a week into your investments over the course of a year, the individual ups and downs of your assets won’t matter all that much because you’ll have invested into them when they’re up and when they’re down. This is essentially pound cost averaging, but it’s not as complicated as it sounds.
Timing the market is incredibly difficult to do, and getting your timing wrong can be frustrating. So, why not take away the stress and invest at a pace that suits you.
Consider your risk level
Market volatility can be unsettling, so it’s a great time to revisit your personal comfort with investment risks. If recent market swings have left you uneasy about your investments, it could be a good time to revisit your portfolio.
Your asset allocation – the mix between riskier stocks and safer bonds – should match your personal goals and risk tolerance. If you’re feeling uncomfortable with the current market dip, it may be a sign you’re holding too much risk in your portfolio.
The charts below shows the drawdowns investors would’ve experienced firstly holding 100% global equities versus 60% global equities plus 40% bonds, and then for investors holding global equities versus just the US:
The main takeaway is clear – diversification can mitigate the pain felt by equity market losses. Investors can choose to diversify within their equity exposure by allocating to global stocks, and they can also diversify between asset classes, by adding or increasing exposure to bonds.
Whatever the situation in markets, the key thing for investors to remember is that investing is a long-term activity. When put against the backdrop of months and years rather than days or weeks, these kinds of shocks to markets are easier to have perspective on.
Important information
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.