As humans, we are hard-wired to respond emotionally to change. As a result, the return to volatility in markets has understandably unsettled many investors. With high inflation, rising interest rates and the ongoing conflict in Ukraine, stock markets in the UK and across the world have suffered.
While volatility can be disconcerting, making any emotionally driven decisions regarding your investments can make matters worse in the long run.
Here we look at three key points to keep at the forefront of your mind during turbulent economic times.
What goes down must come up again
It’s important to remember that downturns are a perfectly normal part of the economic cycle, and whilst drops in the value of your investments may be alarming, there will almost always be a recovery at some point. Following historic downturns, markets that have fallen have gone on to not only recover but also reach new highs. A prime example of this is following the Covid-19 pandemic. In the period following March 2020, we saw one of the most dramatic crashes in stock market history. Despite this, the stock market rallied much quicker than expected, and new highs were reached by the end of the same year. Whilst the current ‘cost of living crisis’ and the war between Russia and Ukraine do not appear to have an end in sight, history shows us that bear markets (where stocks are underperforming) tend to be short-lived, lasting less than a year on average.
Staying invested usually proves to be the best strategy
Understandably, it can be alarming when the value of your portfolio takes a dip. It may be tempting to consider withdrawing funds or switching to less risky investments to protect values from falling further. However, in doing so, you will realise losses, rather than giving your investments the best opportunity to recover and grow. Research has shown that the best long-term strategy is to stay invested and wait for the market to recover. This way you won’t miss the better days in markets.
Financial advice can help to maintain perspective
As an individual investor, it is hard not to let emotions drive your investment choices, however, with the guidance of an experienced Financial Adviser, it is possible to retain perspective and a long-term view. This allows for a more level-headed approach which can avoid the compulsion to react to dips in the market.
Furthermore, an independent Chartered Financial Adviser can help you to build a diversified portfolio – investing across different asset classes, geographical regions, and industry sectors. By approaching an investment portfolio in this way, investments are less likely to respond in the same way to market forces at the same time, reducing the peaks and troughs experienced and therefore resulting in smoother investment experience overall.
We have written before on how to ride out periods of volatility in the market. This advice remains as relevant as ever.
For more information or to speak to one of our financial advisers regarding your investment portfolio, please get in touch.