When the stock markets get choppy, it pays to remember a few key lessons:
1. Keep calm and carry on
Don’t make hasty decisions
Investment decisions made in haste and under stress are rarely good ones, especially in a volatile stock market, so our first piece of advice is to stay calm.
It’s natural to feel uneasy when share prices fall, but begin by putting any market falls into context. After a sustained period (10 years in fact) of growth – from which you may have benefited – it’s usual to see a market correction and prices fall. But you’ll also usually find that they start rallying again within days or weeks.
It’s worth noting that most of the market’s 10 best days over the last 20 years have followed within two weeks of the 10 worst days. So it pays to resist the urge to sell based exclusively on recent volatile stock market movements.
Viewed over the long term, volatility is nothing more than a moment of turbulence on a long-haul flight. So whatever you decide to do, don’t be panicked into stopping investing altogether.
Imagine that you had panicked and sold your shares in October 2008. You would have missed out on the subsequent recovery that began a few months later. The FTSE 100 actually hit its lowest point of 3,460 in March 2009. Yet one year later the FTSE sat at 5,618 – over 60% higher. Many investors who sold out when the market fell, probably with losses, were still afraid to reinvest months later, and failed to benefit from buying shares at some of the lowest valuations for years.
Do take stock
Think about taking a fresh look at your portfolio to make sure your investments remain in line with your objectives and risk tolerance.
2. Accentuate the positive
Don’t give into doom and gloom
Think about what you do know, rather than what you don’t. You may not know for certain that stock market share prices have hit the bottom yet, but you do know that they are x% cheaper than last week/last month/last year. Which means there is still plenty of potential.
For instance, fluctuating prices in a volatile market could give you the opportunity to buy shares in a solid company when the price is very low, and then wait for cumulative growth down the road. In a year or two’s time you could be sitting pretty.
It’s always worth remembering why you chose to invest in the first place. You probably chose shares or shares-based funds as a long-term investment – over five years or more. Despite some short-term volatility, assets such as shares and property have been shown to produce relatively positive returns over the long term. So as long as your fundamental reasons to invest haven’t changed, you could still be on track to achieve your investment goals.
If you don’t think we’ve hit the bottom quite yet, consider making regular, smaller investments rather than investing a lump sum. Buying in stages is a strategy known as ‘pound cost averaging’; it can help increase your returns in a volatile stock market by making the market fluctuations work in your favour.
By regularly investing the same amount in a share or share-based fund, say monthly, the process allows you to smooth out the effect of a volatile stock market. Instead of buying at just one price, you’re buying the same assets at different prices. Obviously, if the price rises you may lose out, but if the price falls, you’ll benefit from more shares at a lower price with the potential for greater capital growth in the long run.
3. Allow for recovery time
Don’t close down your options
If your plan was to take an income from your investments, then our next watchword is to be open-minded. Think about all the potential sources you could take an income from – bonds, property, or cash savings could all be options.
Exploring the alternatives when markets are volatile could give your shares or shares-based funds potential recovery time and so cost you less in the long run.
If tapping into other income sources is a problem, then it’s worth remembering that the return on your shares or funds comes from two sources: the capital return, and the income or dividend return. You could choose to draw only the income or dividends, but leave your capital invested, allowing it the opportunity to recoup all or some of its value in any future recovery (though a fall in value is also possible).
Taking income from investments, and other potential sources, can be very complicated from a tax perspective so it’s essential to get professional independent advice. We should stress however that tax advice is not regulated by the Financial Conduct Authority.
4. Be prepared for a bumpy ride
Don’t be caught out by future dips with volatile stocks
The investment journey is rarely smooth from start to finish. If stock market volatility is the bump in the road, diversification is the shock absorber that will help you get safely to your final destination. As you look ahead, make sure you’re as prepared as you can be for future dips in the market.
Diversifying your portfolio so that you have a spread of investments across the main asset classes (shares, fixed income, cash and property) could help you ride out volatile times. Different assets respond to market forces in different ways: while some fall in value at any one time, others will rise. So it’s crucial to review your mix of investments regularly and make adjustments as needed.
By spreading your investments you’ll reduce your exposure to risk, and give greater stability and protection to your investment overall.
Improving diversification is one of the reasons why most investors prefer to invest in a fund rather than an individual share. Funds have the benefit of leveraging the expertise of the manager in spotting opportunities, as well as spreading risk by investing in a range of companies, rather than relying on the fortunes of just one.
Your stage of life could also be very relevant here. If you’re coming up to or already in retirement, your portfolio should probably look very different from someone who is planning for a young family or starting their own business.
Regular rebalancing is key to ensuring that your investment mix is aligned to your investment time frame and financial needs.
5. Take your profits, harvest your losses
Don’t forget to enjoy your successes
If then, you’ve benefited from a long bull run (upward movement) in the value of shares, or even from a sudden upwardly volatile swing, you should think seriously about taking some profits. Selling a portion of your shares or funds at a good price will enable you to enjoy some gains, whilst protecting you against a sudden dip in the market. The portion you keep still has the opportunity to benefit from continued growth if the market stays buoyant for longer.
If you’ve made significant gains, you should also consider offsetting these against any losses. Harvesting loss can be an important tool to help you reduce your tax bill now and in the future. For example, if Fund X has fallen in value, you could sell it and offset the loss against the increase in value of Fund Y, so eliminating some or all of the Capital Gains Tax you would otherwise owe on Fund Y.
A word of caution. Don’t be tempted to lower this year’s taxes at the expense of a strong, diversified investment portfolio. Choose assets for tax-loss harvesting that no longer fit with your strategy, have poor potential or can easily be replaced by something similar.
Balancing profit and loss in an investment portfolio can be complicated, so it makes sense to get expert advice.
Talk to us
At Chase de Vere we’ll always give you an objective and unemotional view of the investment world. Our aim is to give you the confidence to act when a buying or selling opportunity presents itself, and to help you steer clear of rash decisions that could prove costly with time. For more information, feel free to get in touch with us here or give us a call on 0345 300 6256.
Please note that this article is for information only and does not represent personalised advice.