15th September 2022
general
But volatility is part of investing. The markets fluctuate on a daily basis, and usually experience a significant drop every few years. This is easier to cope with if you know what to expect.
The tips below will help you stay calm during volatile periods.
Keep Enough Cash
When your investments fall in value, this is only a real loss if you need to take money out. Markets usually recover fairly quickly after a dip, which means that if you withdraw your capital, you could miss out.
A cash buffer is an essential part of investing. You should keep an emergency reserve of at least 6 months’ expenditure, as this avoids the need to draw on your investments at short notice. Additionally, if you have any planned spending in the next few years, it’s a good idea to keep the money required in cash. This could include the capital required to top up your income if you are retired.
When investing, the minimum timescale you should consider is five years. This is usually enough time to smooth out any bumps in the market. A cash reserve can help you stick to this, and avoid worrying about short term volatility.
Don’t Second Guess Your Plan
Investing is for the long term. While the minimum timeframe is five years, a good investment strategy will look twenty or thirty years ahead.
Successful investing relies on getting a number of things right:
These principles don’t change just because the market is volatile. In fact, the assumption is that the market will be volatile at some point. Trying to react to events or time the market is usually futile, and can leave you in a worse position.
Sticking to the plan and riding out the volatility offers the best chance of long-term success.
Stay Informed – Within Reason
Everyone has an opinion about world events and how they might impact investments. If you read the financial press, you will be inundated with speculation and stock tips.
It's sensible to keep up with what is happening in the world and how this affects your investments. But this doesn’t mean you need to act on every piece of information.
A key point to bear in mind is that the stock market is not only based on the real value of underlying companies, but also on how investors expect them to perform. If you try to position your investments based on what the media is telling you, chances are millions of other investors have already done the same thing, wiping out any potential advantage. Markets move too quickly for short-term judgment calls to be effective.
It can also be counterproductive keeping too close an eye on your own investments. Reviewing your funds at least once a year is prudent. Reviewing them every day can be frustrating, time-consuming, and not very useful.
Try Not to Make Emotional Decisions
No one wants to lose money, and it’s a natural instinct to want to take money out when the markets are falling. The ‘pain’ of a potential loss can be more intense than the prospect of making longer term gains.
Humans are also inclined to follow the crowd and to seek out evidence that supports a decision they have already made. This can lead to deviating from your plan and making expensive mistakes.
Following emotion and biases is likely to damage long-term returns. Sticking to your strategy throughout the volatility is the best option.
Sometimes it can help to take advice from an objective third party. A financial adviser can coach you to make good financial decisions and help you avoid emotional decisions.
Remember This Will Pass
If you look at any market index over the past twenty or thirty years, you will see a number of ups and downs. In recent history, we have seen a tech bubble, a global financial crisis, and a pandemic, which have all caused the markets to fall.
But crucially, despite the ups and downs, the markets have continued to move in an upward direction. If you invested 20 years ago and simply let the market run its course, you would be far better off than if you had tried to time every investment perfectly.
You may also notice that when the market does drop, the subsequent rise is even more substantial and lasts for longer. Investments don’t rise in a straight line – we rely on the ups and downs to produce longer-term growth.
History tells us that sticking to the plan, trusting the market, and avoiding emotional judgment calls is the best way to achieve your investment goals.
Please don’t hesitate to contact a member of the team to find out more about investment planning.
