Five tips to survive volatile markets
Despite George Osborne’s attempts to calm markets, further volatility is expected as companies and investors deal with the fall-out of the UK’s decision to exit the EU.
With this in mind, Patrick Connolly, a certified financial planner at Chase de Vere, suggests five investment strategies to cope with volatile markets
1. Take a multi-asset approach
Nobody can predict how stock markets will perform in the fallout to the EU referendum result. It is therefore important that investors don’t try to be too clever. Having too much money in the stock market could have a significant negative effect on your overall finances if we see further falls.
You should therefore spread your money across different assets such as shares, fixed interest, commercial property and cash, so you can benefit from long-term stock market growth but also provide some protection for your portfolio.
The right mix of investment assets for you should be determined by your personal circumstances, financial objectives and attitude to risk.
2. Stay calm and sit it out
It is really important to stay calm and rational.
Too many people make investment decisions based on short-term performance or sentiment, meaning they often buy at the top of the market when sentiment is positive and sell at the bottom when it is negative.
Investors will achieve better long-term returns and ride through the difficult times by staying calm, adopting a long-term strategy and sticking to it without being distracted by all of the short-term noise
This means that if your investment strategy was right for you before this recent bout of market volatility it is probably still right for you today.
3. Invest more
Brave investors may see the recent stock market falls as an opportunity to buy.
Despite the current uncertainty, many companies continue to perform well, make consistent profits and have cash on their balance sheets. It is now possible to buy some of these companies at a reduced price.
However, don’t buy just because the price is cheap and make sure you consider any new purchases in the context of your overall portfolio other you could end up taking too much risk.
4. Invest regular premiums
Investing regular premiums (rather than lump sums) is a sensible way to invest during difficult economic times or periods of stock market volatility.
This approach negates the risk of market timing and means that if investments fall in value then units are simply bought cheaper next time, bringing down your average purchase cost.
5. Rebalance regularly
To ensure that you don’t end up taking too much, or too little, risk, you should look to rebalance regularly. This involves selling some of your investments which have performed well and now represent a larger proportion of your portfolio and reinvesting into those which have performed poorly and are now a smaller amount of your portfolio. This will help to get you back to your starting position.
This is particularly relevant during volatile times as the shape and risk profile of your portfolio can change significantly over a short period.
Not only does rebalancing ensure you don’t take too much risk, but by selling investments that have done well in favour of those that have done badly you are effectively selling at the top of the market and buying at the bottom. This is the holy grail of investing and something which very few investors consistently achieve.