If you didn’t start investing before the 2008 financial crisis, then you might not know how emotionally-searing that year was. Or perhaps you did go through it, but have blanked the pain from your memory!
In the years since that time, the investments markets have generally performed quite well for many UK investors (not without various “ups” and “downs” along the way, of course). However, with the USA and China still engaged in trade conflict and the UK potentially facing a “no-deal Brexit” (at the time of writing), many people are understandably beginning to worry about possible falls in their investments’ performance in the near future.
Of course, no one knows for certain how the markets or wider economy will play out. So it would be unwise for our advisers here at Cedar House to claim perfect foreknowledge, and advise our clients on that basis. However, wider financial uncertainty is often a good rallying-call to bring people back to some of the important, foundational principles of investing; in particular, how do you keep a “level head” during investment turbulence?
Remember, risk and uncertainty are built into the nature of investing, so we must learn to navigate this rationally. The reason investors are compensated with interest is due to the fact that the outcome of their investment is uncertain.
The higher the investment risk, the more the investor needs to be offered in compensation (through higher returns). That’s why equities (e.g. investments in company shares) generally offer a higher return than bonds; the former presents a less certain outcome than the latter.
So, how can you better-cope with market turbulence as an investor? How do you stop yourself from simply pulling all of your money away, when things look like they’re heading down and may never come back up?
Here in this short guide, we’re going to be offering some information and inspiration to help you. Please note that this content should not be taken as financial or investment advice. To receive such advice, please consult an independent financial adviser.
Keep a Wide Perspective
One key ingredient to successful investing is to try and look at the big picture. Think about the analogy of warfare, such as World War II. If you simply focus on the short-term battles (e.g. Pearl Harbour, 1941) then you might lose sight of the general direction of the war, where you might be winning. When it comes to investing, it’s important to step back from whatever negative performance you might be looking at right now (e.g. this week, or this month), and survey the past 3, 5 or 10 years. What’s the overall movement of travel? Have your investments gone up and down like this before, and yet later continued an overall steady climb?
If you have a strong investment portfolio and good financial adviser, then you should be able to answer this latter question with a confident “yes”. Successful investing isn’t about winning every day and at every opportunity. It’s about moving forwards over time.
Keep News at an Arm’s Length
Please don’t misunderstand us here. We’re emphatically not saying that you should shield your eyes from the BBC, Financial Times or other reputable news outlets which might be commenting on the markets and the wider economy. However, it’s also true that the media can often work people up into a state of panic (e.g. “No-deal Brexit could wipe £70bn off UK’s economy in two years”).
At the same time and amidst all of this, there is the “fake news” circulating social media, blogs and internet forums which only tends to make things worse. The point is this: if all of us only ever spent time listening to financial news (which tends to focus on negative stories), then we would likely never take the risk of investing at all. We’d all be too paralysed.
Excessive focus on the news often feeds into the previous point; it can lead us to pay too much attention to the “losing battles” in our investment strategy, rather than its wider success. Bear in mind that headlines are brief, and, by nature, only capture the moment.
2016 is a good case in point (i.e.g the year of the Brexit referendum). The global market fell by around 10% during that year. Yet by the end of the year, it had increased by almost 30%.
This isn’t to say that “everything always works out alright in the end”, when it comes to investing. However, it is a reminder to try not to panic when the markets wobble or even appear to be plummeting. Those who panicked and pulled out of the market in 2016, for instance, likely would have missed out or suffered financially, compared to those who stayed in.
So, we’ve outlined some general tips and insights for coping better with investment falls and volatility. However, what other principles are important to remember, on this subject? Consider the following with your financial adviser:
- Remember, you haven’t actually “lost money” on an investment until you sell it, no matter how far down it goes.
- Always remember that you cannot time the markets. No one can do this, so don’t try.
- Look at your portfolio regularly, but not obsessively or too often. Every day is excessive, for instance. You can probably safely look at it every couple of months.
- Market falls can offer financial opportunities. For instance, “pound cost averaging” allows you to keep buying shares, but at a lower price. Over the long term, when things bounce back up, that would mean you end up better off.
- Diversification is key. By having “defensive” assets in your portfolio, in particular, you can help to “absorb the shock” of certain fluctuations and declines in various markets. The composition of these assets in your portfolio will look different to everyone, however, depending on your risk tolerance and financial goals.