You will know from watching the news or reading the papers that the world’s economies are going through a period of uncertainty. 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 head when all around you, others are losing theirs.
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 £772,830 compared to £545,566 for Investor B – over £227,264 more. If Investor B wanted to accumulate the same pot starting later, they would need to invest £14,166 every year.
4. Don’t just have 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.
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