InvestmentAAM Investing through volatile times

The seven principles of investing through volatile times

You will know from watching the news or reading the papers that the world’s economies are going through a period of even more uncertainty due to the ongoing crisis in the Ukraine.

It is only natural at times like these for you to feel more cautious. The truth is that share prices invariably rise and fall, but historically long-term performance tends to even things out and there are good reasons even now to see investment opportunities.

Below are seven principles of investing when markets are in turmoil, to enable you to keep your focus.

1. Get advice

Every single investor’s needs are different and, while the points below are good general tips, there is no substitute for a plan that is tailored specifically for you.

The role of your wealth manager is to get to know you and your attitude to risk versus reward, and then to guide you through your investment journey. What is more, in turbulent times, advice helps you take the emotion out of investing and provides an objective view. Advice may just be the best investment you ever make.

2. Make an investment plan and stick to it

It is one thing to have a target, but having a sound financial plan is the difference between simply hoping for the best and actually achieving your goals.

A plan helps you to stay focused on your long-term aims without being distracted by short-term market changes. The best way to formulate your plan and ensure it stays on track is with a professional wealth manager. Your Wealth Manager will talk to you about what you want to achieve for you and your family, your current situation, and your attitude to risk versus potential rewards. As well as tailoring a plan specifically to you, your Wealth Manager can monitor your progress and recommend ways to keep you on track.

3. Invest as soon as possible

The earlier you begin to invest the better. The magic of compounding allows investors to generate wealth over time and requires only two things: the reinvestment of earnings and time. The difference of just a few years can make a massive difference to your end result.

The chart below shows what happens to two investors who both invest £10,000 every year into global equities. Investor A began in December 1996 and Investor B started five years later. Since December 1996, Investor A has accumulated £ 1,028,461compared to £ 729,876 for Investor B – over £ 298,585 more. If Investor B wanted to accumulate the same pot starting later, they would need to invest £ 14,326 every year.

Investing through volatile times March 2022MSCI Investor A B (003)-01
Past performance is not a guide to the future. The value of units may fall as well as rise. Source: MorningStar Direct as at 22 Feb 2022. Based on an initial investment of £10,000 into the MSCI World Index over the period December 1996 to 31st of January 2022. The information provided is for illustrative purposes only and doesn't represent the past performance of any particular investment. It is not possible to invest directly into the MSCI World Index

4. Don’t just invest in cash

When markets are volatile it’s a big temptation to move all your investments to the perceived relative safety of cash. It may seem like a safe bet. However, at just 2.5% inflation, an investor would lose nearly half of their purchasing power over 25 years. So, £10,000 today would only have the purchasing power of £5,394 in 25 years’ time.

Everyone needs to have some money in cash in case of an emergency, but low risk often leads to lower returns. For anyone with longer term investment plans your cash holdings need to be supplemented with investments in other asset classes that offer the potential of capital growth and in addition can preserve value against the effects of inflation.

5. Diversify your investments

When markets are fluctuating wildly it is all too easy to worry about the performance of individual investments while forgetting about the bigger picture.

Remember, when one asset class is performing poorly others may be flourishing. By having a diversified portfolio, including a range of different assets, you can iron out the ups and downs and avoid exposing your wealth to undue risk.

6. Invest for the long-term

Many people believe that knowing when to buy and when to sell is the secret of successful investing. The truth is that no one knows with certainty when markets will rise or fall. Trying to time the market is not only stressful, but also is rarely successful.

It is far better to let time work to your advantage. The sooner you start investing, and the longer you remain invested, the more likely you are to have the potential for healthy returns, achieve your financial goals, and overcome short- term blips.

7. Stay invested

When markets are volatile, it is often tempting to exit the market or switch to cash in an attempt to reduce further losses.

However, as no-one has a crystal ball to predict future movement, it is impossible to time these movements correctly. Being out of the market for just a few days can have a devastating effect on your returns. Make a plan, stick to it, and don’t try to time the market.

Using global equities as an example, the chart below shows how missing just a few of the best days can have a big impact on overall returns.

Reacting Can Hurt Performance-01
Source: Dimensional Fund Advisors

Important information

The article is intended for general circulation and for information purposes only. It may not be published, circulated, reproduced, or distributed in whole or part to any other person without prior consent of AAM. This document/article should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any investment products. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of the investment product before making a commitment to purchase the investment product. Past performance is not necessarily indicative of future performance. Any prediction, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of future performance. The value and any income accruing to the investments, if any, may fall or rise. An investment is subject to investment risks, including the possible loss of the principal amount invested. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this document is subject to change without notice. The above report may contain data obtained from third parties and as such we cannot guarantee the accuracy of this data.