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22/10/2014
"For more than two years now, stock markets around the world have risen with barely a pause for breath. After such a period the last couple of weeks have come as a shock, but we should not forget that market ups and downs are what we should expect."

A correction of 10% or so is unsettling but is of no concern if you do not need to sell. De-risking your portfolio can however act as reassurance, below are a few ideas on how best to do this.”

1. Remain diversified: The best protection against market uncertainty is diversification. A stocks and shares portfolio allows you to place your eggs in several baskets by investing in a spread of investment vehicles such as bonds, equities and funds. Yes, this is a more risky option than a cash portfolio, but the true value of a stocks and shares portfolio tends to manifest itself over the long term, with greater returns than cash.

2. Invest regularly: You should also consider regular saving and drip-feeding your money into the market, benefiting from a process known as pound cost averaging. This means that you buy more units when prices are low and fewer when prices are high. Buying at a variety of prices and spreading ongoing investments over time helps to cushion your portfolio from dips in the stock market. This also allows you to keep some powder dry in case there is a more significant downturn.

3. Pay for quality: In uncertain times, people will pay for certainty and this tends to favour companies that can demonstrate sustainable growth, operational diversity and good management. Investing in funds focused on good-quality companies with strong balance sheets paying an attractive level of dividends could be one way of ‘playing it safe’.

4. Take a long term view: Volatility is the price that equity investors pay for long-term outperformance. Investing should ultimately be a long-term game and investors should not be put off by short-term market jitters. An investor who remained fully invested from 1994 would have earned a total return of more than 300%. One who missed just the ten best days in the market would have reduced their return by two thirds to just over 100%*.

5. Cash is not king: Interest rates lingering at historical lows for more than five years now, means investors need their investments to work even harder to generate a decent level of income. Holding your money in cash can result in very limited returns over time. It also risks real-term losses if your returns fail to keep up with inflation rises and the increased cost of living.

6. Keep calm and carry on: Although corrections are painful, they do reverse in time.

Since 1950 the US market has fallen more than 13% in a three month period 24 times. On 15 of those occasions the market bounced back by at least 20% over the following 12 months. For those with the courage to grit their teeth and buy into the pull-back, volatility can provide an opportunity to top up a portfolio at a much more attractive price.

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