Investing in the stock market can often be a bit of a rollercoaster, with share prices rising and falling along over time, with the occasional sudden, alarming change in direction.
This is ‘market volatility’. And, like it or not, it’s an integral part of investing. Investments that aren’t volatile — cash, most obviously — tend to deliver lower returns, especially over time.
However, while market volatility is normal, there are ways to reduce its impact on your portfolio:
Diversify your investments
Spreading your money across a range of investments that react differently to market and economic events helps reduce volatility.
This is because when one investment is falling in value, another may be rising, evening out your overall performance. The result is a smoother ride for your portfolio.
Investment diversification generally involves putting your money into a combination of different stock markets and asset types (bonds and alternative investments such as gold, as well as shares).
ETFs (exchange-traded funds) offer a quick and easy way to diversify, typically spreading your money across an entire market (or markets) in a single transaction. For example, the Vanguard S&P 500 ETF invests in the shares of 500 of the biggest companies in the US, including Apple, Amazon and Tesla. You can read more about the benefits of ETF investing here.
Save regularly
If you invest everything in one go, you’re fully exposed if the stock market takes a tumble.
If instead you invest a bit at a time, for example every month out of your salary, you’re less vulnerable to a sudden fall. Should the market drop, you’re in a position to take advantage by adding to your holdings at a lower price.
Regular investing can be a reassuring way of building up your wealth, with each additional contribution helping to offset any downturn in your portfolio’s value. And when markets are rising, even though you’re buying shares at higher prices, those ongoing contributions increase your exposure to further gains.
Technically speaking, regular investors can benefit from an effect called ‘pound-cost averaging’ (sometimes called ‘dollar-cost averaging’ or ‘DCA’). If you invest a fixed sum each month it buys more shares when prices are lower, and fewer when they are higher. Your average purchase price per share then works out less than the average price in the market over that period — giving your investment a lower-than-average starting point.
With InvestEngine you can set up a monthly direct debit for as little as £50 to invest regularly. With our Managed portfolios your direct debit is invested automatically, while DIY investors can turn on the AutoInvest feature in their portfolios to invest according to their chosen portfolio weights.
Take a long-term view
While financial markets can be volatile in the short-term, look at a long-term performance chart and you’ll be surprised at how relatively unimportant the big crisis periods can look.
Over the long term stock markets tend to rise, and falls along the way lose impact as markets recover.
Also, short-term corrections are often quickly followed by days when the market bounces back strongly. So the danger of panicking and selling when markets fall is you miss the bounceback — and then have to reinvest at a higher price than you sold at.
If instead you ride out the falls — perhaps even adding to your investments when prices are low — you’re well-placed to catch the recovery whenever it comes.
Our commission-free DIY investment service offers a choice of 500+ ETFs along with the tools to help you build a diversified portfolio for the long term. Or with InvestEngine’s Managed portfolios we do the work for you, building and managing a diversified portfolio of ETFs for the long term, for an annual fee of just 0.25% (ETF costs also apply).
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.