In this blog: it's tempting for investors to look at recent events, as well as the year ahead, and worry. Here's how to cope with market uncertainty:
Learning to cope with and navigate market volatility is crucial to successful investing. Here, even the most experienced investors can continue to develop, and financial advice can be particularly helpful to guide your investment decisions.
If you are concerned about potential market volatility in 2020, we offer the following four tips to help:
#1 Stay in the markets; don’t time them
It is notoriously difficult for investors and fund managers to accurately and consistently predict what will happen in the markets, and make effective preemptive decisions.
Consider the events leading up to and after the 2016 EU referendum, from the perspective of the FTSE 100.
In the days leading up to the 23rd June date of the vote, the FTSE 100 dropped from 6,300 to nearly 5,900 as a range of opinion polls suggested Leave might win.
By 20th June, the polls were more mixed and one even put Remain ahead, correlating with a rise of the FTSE 100 up to 6,200. Following the announcement of the referendum result, many people were surprised and the index fell to below 6,000. Once it became clear, however, that the UK would not trigger Article 50 for some time, the FTSE 100 climbed higher than the 6,300 leading up to the vote.
During this period (and similar ones) it was tempting for many people to pull out of the markets, fearing an imminent economic shock. Yet those who would have tried to do so would have likely suffered financially as a result. Three years later, the FTSE 100 and other indexes have continued their long-term trajectory of climbing higher, despite numerous points of decline.
The essential point is this: whilst past performance cannot guarantee how future results will transpire with your investments, committing to a long-term strategy tends to offer greater rewards than trying to actively predict every short-term weather movement of the markets.
#2 Expect inevitable falls
This is more of a psychological observation, but it is important nonetheless. It is a lot easier to cope with a temporary fall in your investments if you expect these to happen over ten, twenty or thirty years. Investing is never a continuous, straight upward line. Rather, when done properly it tends to be a jagged line with many ups and downs - yet following an overall upward trajectory. The key here is not to panic, and to remember the nature of the beast.
#3 Diversify appropriately
Whilst financial advisers such as ourselves place a lot of faith in the markets for investment growth, there are still cases of failure to shield yourself from. The aforementioned Woodford collapse is a case in point. Widely regarded for many years as a “world-class fund”, the UK Equity Fund beat the FTSE All Share quite consistently throughout the early 2000s. Yet by 2019, it has vanished and many investors are out of pocket. Those who spread their risk across several funds and asset types, however, might still have lost out. Yet their diversified portfolio would have helped see their portfolio through the storm. Be careful not to put all your eggs in one basket. Speak to your financial adviser to ensure you are properly diversified.
#4 Consider drip-feeding
One of the most emotionally-daunting moments for an investor occurs when they are considering investing a large sum into the markets. How do you know whether you are catching them at their trough and about to rise, or at their peak and about to plummet? It can feel very “all-or-nothing”, raising the emotional stakes and increasing the likelihood of making impulsive, foolhardy investment decisions.
If it is at all possible, consider speaking to your financial adviser about “pound cost averaging”. Here, you commit smaller regular sums towards your investments over many months and years, rather than putting in a single large amount and hoping for the best. Not only does this remove the pressure of trying to time the markets correctly, it can sometimes lead to stronger returns during market falls. After all, during these times you might keep buying the same stocks but for a cheaper price. If their value then rises again in the future, you potentially could be better off than if you’d tried to time buying these stocks with a lump sum.