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Experienced Investor

Trick or treat? How investors can ride out the market turmoil

Paloma Kubiak
Written By:
Paloma Kubiak

Investors have faced 10 long months of tough market conditions. Here’s what continues to spook them and where they can take cover.

This Halloween is spookier than most for investors. Stubborn rises in the cost of living and high interest rates have led to a broad ‘reset’ in the value of many assets this year.

Political events have added to the volatility. With huge media attention and minute-by-minute commentary it’s easy to be rattled, but it’s important to keep a clear head in order to protect your portfolio and position for eventual recovery.

1) Ride out the ghost train

Market sentiment can be fickle, and the mood can range from optimistically sunny to dark and brooding. This makes volatility an inevitable part of investing, a necessary evil, and investors must be prepared to ride through scary moments.

Keeping everything in cash is the most secure thing to do in the short-term, but keeping too much in the longer term could be more trick than treat. Inflation, representing rises in the cost of living, is gradually eroding its spending power. Through compounding more volatile stock market returns, and ignoring short-term noise, you give yourself a better chance of meeting long-term financial goals.

It’s often the case that the market falls more quickly than it rises, which is psychologically challenging, but as long as you have a long-term view you shouldn’t be too concerned. If feasible, you can look to add to your investment to take advantage of lower prices.

2) Don’t be hasty when things go bump in the night

Staying calm during market turmoil isn’t easy, especially when the headlines seem universally negative. Your first instinct may be to abandon investments, but selling out in fear can be the worst thing to do. Large falls can be followed by large gains, so you risk losing on both sides – selling when prices are depressed and not buying in until they have moved higher.

Sadly, this is a trap many investors fall into. Being out of the market also means you are no longer collecting – and potentially reinvesting – any income your investments are paying. This is an important component to returns, but is often overlooked. In the absence of a crystal ball, keeping invested is often the best strategy, so long as your needs haven’t changed, although it can be uncomfortable.

Daily monitoring during a falling market can result in an over-emotional reaction and make rational decisions difficult. If you have a well-diversified portfolio of collective investments such as unit trusts and investment trusts, as well as a strategy you are happy with, then a less regular (for instance monthly) check should be sufficient.

3) Whistle past the graveyard – and take advantage

If you have been keeping some cash in reserve, a market horror show could be an opportunity to consider investments that you previously thought were fundamentally attractive but too expensive. Often the market overly punishes certain areas or particular assets as frightened investors sell everything they can. This can present opportunities.

It is almost impossible predicting the bottom of a market dip, but if you are expecting a rapid rebound then investing a lump sum to take advantage makes sense compared with dripping money in gradually.

If, however, you are more nervous about the short to medium term outlook, one way to counter market ups and downs, as well as remove stress about timing from the equation, is to contribute money at regular intervals, say once a month. This can turn market volatility to your advantage as you average down if prices fall further. In particular, you could maximise your position by increasing pension contributions, boosting your return with tax relief.

4) Keep on track despite the bogeyman

Sudden market turmoil after a calm period can reveal skeletons in the closet: vulnerabilities in your portfolio and just how volatile certain elements can be. If this is a shock you weren’t prepared for, it may be time to revisit investment goals and risk appetite, and whether you have too much in the most volatile assets.

Difficult markets can help reveal what your true temperament is. If required, you could add areas to diversify to help smooth out returns, though bear in mind this may dilute the long-term potential of a higher risk portfolio going forward, and that any changes should be thoughtful and measured rather than hurried.

When you invest in the stock market you are buying into stakes in companies. As a shareholder, you participate in the growth of the business if it does well and often receive a share of the profits through dividend payments. Sharing in the profits and growth of companies means your capital is potentially exposed to losses, but over long periods history shows that investors often benefit from taking these risks. Volatility is the price we all pay for entry into the wealth-generating capability of markets.

5) Don’t put yourself in a vulnerable position

Whatever your thoughts about market volatility, you should not put yourself under financial strain in pursuit of investment gains. If you can’t afford to invest more right now, or investing will leave you short of cash you might need in an emergency, then don’t be tempted into bargain hunting in markets.

Having an appropriate margin of safety and striking the right balance between risk and reward is something every investor must consider and revisit periodically – it’s important that you make the most of your money, but without losing sleep over it.

Rob Morgan is chief investment analyst at Charles Stanley