Volatile times can spook investors. But it’s still a good call to remain invested. Find out why from Sue Williamson, a Chartered Financial Planner at Acumen Financial Planning.
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Since January 2022, investors have seen the value of their investment portfolios reduce, having been affected by external factors such as the conflict in Ukraine, the rising cost of living, increases in energy prices and more recently, political uncertainty.
At times of increased volatility, it may be tempting to consider selling your investments and switching to cash to avoid further losses and reinvest in the future when markets recover.
However, timing the market is a risky strategy as investors risk missing out on some of the best days of performance, which can have an adverse effect on long term returns.
Investors should not try to time the market; it is more important to consider time in the market. History suggests that investors have had a positive experience when they remain invested when markets fall.
As it is impossible to predict which asset class will perform well each year and there is no guarantee that a sector that performs well one year will still perform well the next, the importance of a well-diversified portfolio, including different asset classes, spread geographically, cannot be underestimated.
Traditional asset allocation might include a combination of growth assets, such as equities and commercial property, defensive assets, such as bonds (debt instruments issued by governments or companies) and cash. The mix of assets will depend on several factors, including attitude to risk and capacity for loss.
Generally, growth assets such as equities generate higher returns over the longer term when compared with bonds but carry higher levels of risk. Defensive assets are unlikely to be affected by stock market volatility in the same way as growth assets but are unlikely to offer the same potential for growth. Future income requirements may also be met by investing in defensive assets due to their reduced volatility.
If you are considering investing whilst markets are uncertain, you could consider phasing your investment into the markets over a 6 or 12 month period. This means you buy units at different prices each month, buying more when the price is low and less when the price increases. This is known as pound cost averaging, a strategy that regular investors enjoy, perhaps when contributing to a personal pension. This can provide some comfort when investors are concerned about stock market volatility.
As mentioned earlier, patience is key. History suggests that global stock markets will reliably produce returns above inflation over longer periods of time, usually 5 years or more, albeit with volatility during shorter periods of time.
If you require advice regarding investments, including creating a diversified investment portfolio suitable for your own personal circumstances, it is best to seek independent financial advice.
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