When markets are experiencing volatility, it can be a human instinct to gather your investments and withdraw them from investment risk and shelter them in a safe haven. Belinda Coombs provides her insight into why remaining invested in the markets is beneficial over the long term.
Remember your objectives
The downturn of any investment can be painful to watch – but remember what you chose to invest in. If you invested in funds which invest in equities, then market downturns should be expected and they are generally shortlived.
Your investment strategy, which we consider to be a combination of your investment plan, attitude to risk and financial goals are what should be driving your investment decisions – so it is important that your actions are specifically geared to meet your goals and the timeframe that is required.
Over the long term, the equity markets tend to recover and using an indicator of the FTSE100, the shares of the largest 100 companies listed on the UK stockmarket, the last 30 years has seen a rise in the index in 21 years and a fall in only 9 years. Over this 30 year time period, the FTSE 100 index has risen by 448.87% providing some reassurance of the potential of the markets. Although past performance should not be used as an indicator of the future, it can help us to make more informed judgments rather than responding to short term market performance.
Review your risk levels
The funds you have chosen will reflect your own attitude to risk and the fund manager’s expertise will be identifying suitable investment opportunities within their fund mandate.
If the market falls have caused you some concern, you should consider a review of your risk profile. Generally there is a trade off between risk and return, so the more risk you are able to take, the greater volatility you can expect on your investments. As you approach your investment goals, such as retirement or a target value to meet a financial cost, then you may look to reduce the level of risk in your investments.
The challenge of timing the market
Human behaviour does encourage you to leave the market when there is a market fall, but invariably this is after a fall – so action is often taken after most of the fall has happened. Being out of the market also brings a second problem of when to re-enter the market – and invariably again, this decision will be made after there has been an upturn – meaning that your investments will miss out on the initial recovery.
Timing the market is a challenge that investment experts around the world debate at length with varying theories and indicators and no-one has yet cracked that code and whilst there are some investment success stories, there are also many errors in judgement and in many instances sitting tight and staying invested is the best option.
One strategy to combat timing the market is making regular investments. This ensures that you buy at variable prices – highs and lows – avoiding buying at a peak with a lump sum. But a downturn can present a buying opportunity as your investment will buy more units in your fund.
Spreading your investments across different types of investment i.e. equities, property or bonds or different geographic areas is another way to help you protect your investments from downturns. For example, if a market has a downturn in one investment area, this impact may be balanced by an upturn in another area of your portfolio, so you avoid having all your eggs in one basket. Clearly, in some instances downturns are widespread – which may have an impact on all investments.
It’s only a loss when you sell
If you do not need to access the funds, then you should consider keeping the money invested to give your investment the opportunity to grow again. The only way you will actually secure a loss or lower value of your investment is if you withdraw the investment. So the old adage of keep calm and carry on can apply.
Looking for alternatives
If you do look for a safe haven or more secure investments, such as cash, then you need to recognise that the effects of inflation may reduce the real value of your funds in the future as inflation is currently higher than returns on most cash based investments. However, we always recommend that you have access to cash in a rainy day fund of between three to five months of your normal expenditure.
Turn to us for advice
Our advice services can help you to review your progress towards your financial goals, which will include some twists and turns along the way. It is important that our reviews take a look at the overall picture and your financial needs. Our advisers can help you to ensure that your portfolio is designed to help you towards your financial goals.
If you are concerned about your investments, please contact your Origen adviser who can review your attitude to risk and your financial goals to help you make the investment choices that are suitable for you.
This artical is for information only, based on our understanding as at December 2018 and is not to be taken as Financial Advice.
CA3120 Exp 12/19