Investments

How to cope during market volatility

How to cope during market volatility

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.

What should you do if you suddenly see your portfolio fall dramatically in value (during a stock market crash, or “bear market”)? The natural human impulse is to sell and “cut your losses” before things get any worse. Yet, is that truly the best strategy? One lesson from the COVID-19 Market Crash is how quickly markets can recover. In March 2020, many funds plunged by more than 25% as investors reacted to news of national lockdowns. Yet by the summer, markets had recovered. Towards the end of 2021, the S&P 500 stood higher than its pre-pandemic highs. 

Of course, looking back with the benefit of hindsight, it is obvious that investors should have stayed the course during COVID-19 market turbulence. Yet how can investors keep emotions under control when markets are volatile? How can you keep a cool head when everyone else seems to be losing theirs? In this article, our team at Cedar House offers some thoughts.

We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:

020 8366 4400 or enquiries@cedarhfs.co.uk

 

Remember history

One of the best ways to prevent impulsive decisions during market volatility is to remember how things have played out in the past. Recently, markets pulled back as news of Russia’s invasion of Ukraine swept the world. In the first week, for instance, the value of the FTSE 100 dropped by 3.5%. Yet, by the end of March, the index had recovered – following the historic pattern (i.e. a sharp fall when a war breaks out, but then recovery as markets calm down and adapt to the new investment landscape). 

Remembering history, therefore, can help you stay true to your investment strategy during times of uncertainty. Indeed, bear markets can even be an opportunity to buy more funds and shares “on the cheap” (before they start to recover). Markets tend to recover from dips. They did after the 2008-9 Financial Crisis, and the same held true earlier in the 20th century (e.g. following the Great Depression). 

 

Mind your biases

Although it can help to look back on history to bring a sense of calm, humans are still subject to strong emotions that can make rational decisions difficult. Here, it can help to avoid looking too much at your portfolio during volatile periods. Watching price movements is only likely to make you stressed and make impulsive choices to “escape” the panic you feel. Also, many investors benefit from talking through their concerns with their financial planner/adviser. Having a second opinion and “sounding board” can help put your worries into perspective, offering opportunities for you to consider other insights and information you may not have thought about.

Remind yourself that you committed to an investment strategy before the volatility occurred – which accounted for the possibility. For instance, your financial adviser likely asked you (before drawing up your strategy) questions to establish how much risk you were happy with: e.g. “How would you react, or feel, if your portfolio suddenly fell 25% in one day?” If you were honest with yourself and with this person, then your choice of assets should have reflected your answer. Now that the volatility is occurring, therefore, it makes sense to follow the strategy you agreed together when you had a clear head – not make big changes now, when strong emotions are likely clouding your judgement.

 

Focus on the long term

An important factor to consider when approaching market volatility is your investment horizon. As a general rule, the more years you have before you to invest, the more risks you can often take with your portfolio. This is because there is more time to recover from stock market losses and then surpass them. However, if you have a shorter “window” until you need the money (e.g. you plan to retire in a few years) then it becomes more appropriate to consider de-risking your portfolio. After all, if a bear market occurs just before you use your pension money to buy an annuity, you do not have time to wait for your investments to recover.

This is why most financial planners recommend moving towards more “cautious” or “defensive” assets as you enter retirement (e.g. fixed-income securities, like government bonds). If a stock market crash occurs, then your portfolio should be less affected. However, in today’s world of low interest rate (historically speaking), many investors will likely still want to include at least some equities in their portfolio to help sustain growth during retirement. Whilst assets such as bonds are “safer”, they also offer lower returns which may – or may not – keep up with inflation (the cost of living).

 

Conclusion

Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:

020 8366 4400 or enquiries@cedarhfs.co.uk

 

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