Top Tips for Investors in a Volatile Market

Volatility has returned to the markets – in a big way.

Those that have invested in the stock market over the few years prior to the start of this year will likely have enjoyed sustained and stable growth. The return to volatility this year therefore has been a sharp, stark wake-up call for many.

Those who are experienced investors will know that downturns in stock markets are inevitable. It is, however, understandable for those who have only held investments for a short period of time to  start to feel uncomfortable with their position.

Here are 6 tips to help investors ride out periods of volatility.

Don’t panic!

Although seeing a fall in the value of your investments can be disconcerting, you shouldn’t forget that we’ve been here before – and actually, during previous market crashes, the short term pain experienced by investors following the bursting of the tech bubble and the global financial crisis was far in excess of that which has been experienced during 2018.

Try to avoid taking an emotional response – look at your position from a wider perspective and think carefully about your options before making any knee-jerk decisions.

Remember what your objectives are for your investments

Our message to clients when investing is that they must be prepared to retain their investment portfolio for a period of, at the very least, 5 years. It is the existence of short term market corrections that drives the need for this discipline; investors should never find themselves in the position where they need to sell their investment portfolio immediately following a market correction to meet certain goals or objectives.

So if you hold an investment portfolio, chances are the investments will be earmarked for a goal or objective 5 or more years away. It is important that you remember this objective during periods of market stress; you were always intending to achieve capital growth over a long period of time, downturns are merely part of the territory of investing in growth assets.

Consider what you stand to gain by selling to cash

Investors that find a drop in the markets (or the potential for a drop) too much to bear might decide to disinvest and hold their money in cash. Whilst this will give you short term certainty, you must remember that, at some point, the market will turn around and you will at that point be tempted to invest your cash again. The chances of you timing the two transactions correctly such that you would gain relative to leaving your money in the market are slim at best.

Take advantage of the dip

Although volatile markets generally result in people spreading their risk in an attempt to mitigate losses, those with a higher tolerance for risk and capacity for loss might actually view a volatile market as a chance to make large gains! There will always be winners and losers and if you’re prepared to stay invested in growth assets, and potentially ride out large paper losses, you could make significant gains in the long-term.

Is your asset allocation appropriate?

Portfolio drift occurs when certain assets in a portfolio outperform others over a period such that they then represent a greater proportion of the over portfolio. It is important that your overall investment portfolio reflects accurately your goals and risk profile, and given the recent volatility, you may find that you are overexposed to certain assets and underexposed to others.

Take a look at your portfolio or get in touch with your adviser to check what your current asset allocation is. If you feel your asset allocation is too heavily weighted in one area, consider changing it.

Diversify

In times of high volatility, a well-balanced portfolio can result in a smoother experience for the investor– i.e. it will often be the case that when a particular type of investment takes a hit, others included within the portfolio will remain steady or increase in value, thereby reducing the volatility of the investment portfolio as a whole.

On occasion, you will find that the different types of investment included within your portfolio perform together (i.e. move in tandem) and this tends to occur in times of extreme market stress. That said, diversification still has a place in wealth management and has been proven to provide a favourable investment experience for many.

For more advice on your investments, or to discuss developing a portfolio alongside a financial plan, please contact us.

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