When market volatility strikes
- 15th June 2020
The current situation is anything but normal. When stock markets start correcting, daily injections of bad news may sound as though it will never end.
Volatility in the financial markets usually fluctuates based on where we are in the economic cycle and is something that the seasoned investor expects.
The current situation however is anything but normal. When stock markets start correcting, daily injections of bad news may sound as though it will never end. This can spark anxiety, fuel uncertainty and trigger radical decisions.
From the unprecedented global impact of the Coronavirus pandemic to the continuing Brexit saga, add to this US/China tensions and the ongoing debate over the European Recovery package and as expected, market uncertainty will prevail. But it’s essential not to panic and to keep perspective when markets are turbulent.
Whether rough seas or a volatile stock market, the same rules apply. When storms rock the boat, don’t jump ship. Wait for the bad weather to pass and stay the course.
Here are some strategies to consider when volatility strikes.
Keep calm – short-term volatility is part and parcel of the investment journey
Markets can fluctuate depending on the news flow or expectations on valuations and corporate earnings. It’s important to remember that volatility is to be expected from time to time in financial markets, it will pass and markets will recover. It is time in the market, not timing the market.
Short-term volatility can occur at any time. Historically, significant recoveries occur following major setbacks, including economic downturns and geopolitical events.
While headline-grabbing news can affect short-term market sentiment and lead to reductions in asset valuations, share prices should ultimately be driven by fundamentals over the long run. Therefore, investors should avoid panic-selling during volatile periods so that they don’t miss out on any potential market recovery.
Remain invested – long-term investing amplifies the chance of positive returns
When markets get rocky, it is tempting to exit the market to avoid further losses. However, those who focus on short-term market volatility may end up buying high and selling low. History has shown that financial markets go up in the long run despite short-term fluctuations.
Though markets do not always follow the same recovery paths, periods after corrections are often critical times to be exposed to the markets. Staying invested for longer periods tends to offer higher return potential.
Stay diversified – diversification can help achieve a smoother ride
Diversification basically means ‘don’t put all your eggs in one basket’. Different asset classes often perform differently under various market conditions.
By combining assets with different characteristics, the risks and performance of different investments are combined, thus lowering overall portfolio risk. ESG and Tech assets at the moment are holding their values, if not increasing which in many cases will offset potential losses in other less resilient assets.
Stay alert – market downturns can create opportunities
When market sentiment is low, valuations tend to be driven down, which provides investment opportunities. In rising markets, people tend to invest as they chase returns, while in declining markets people tend to sell. When investors overreact to market conditions, they may miss out on some of the best-performing days.
Although no one can predict market movements, the times when everyone is overwhelmingly negative often turn out to be the best times to invest.
Invest regularly – despite volatility
When investors make fixed regular investments or drip feeding as it’s otherwise known, they buy more units when prices are low and fewer when prices are high. This will smooth out the investment journey and average out the price at which units are bought. It therefore reduces the risk of investing a lump sum at the wrong time, particularly amid market volatility.
The longer the time frame for investment, the better, because it allows more time for investments to grow, known as the ‘compounding effect’. Read more about drip feeding in volatile markets here.
For more information about investing in a volatile market, read our Guide to Investment Insights.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. INVESTMENT SHOULD BE REGARDED AS LONG TERM AND FIT IN WITH YOUR OVERALL ATTITUDE TO INVESTMENT RISK AND FINANCIAL CIRCUMSTANCES.
THIS CONTENT IS FOR YOUR GENERAL INFORMATION AND USE ONLY AND IS NOT INTENDED TO ADDRESS YOUR PARTICULAR REQUIREMENTS OR CONSTITUTE ADVICE.
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.