How volatility can be an investor’s friend
What goes up must come down. It’s as true of investing as of life. You will have off days and so will your portfolio, but neither is cause for despair. In fact, you may find opportunities in the bumps.
Volatility – fluctuations in the value of your portfolio on paper – is a normal part of long-term investing.
Stocks and bonds of the companies and countries you invest in are affected by global events, business threats, and the overall economy. These will temporarily change share prices and bond yields. There’s no way of avoiding this.
Company stocks are often more volatile than bonds, which tend to fluctuate in value more than cash in the bank. But over time, you can be rewarded in return for taking more risk, even if the road to those rewards is a bit bumpy.
This month Netwealth, a wealth manager, published some research into how important it is for investors to embrace, not exit, choppy waters.
Two in five prospective UK investors it asked were deterred from investing in 2019 because of Brexit, and fears of a Corbyn government kept one in three away.
Crunching the numbers,
Netwealth opined that this cautious bunch might have missed out on returns in the past year.
Timing the market is incredibly hard even for the pros. If you are able to wait, it may make sense to stay invested and wait for the value of your portfolio to go back up.
Remember, the FTSE 100 sank 47% in the 2008 financial crisis. Five years later investors in the index had recouped their losses, and probably kept receiving dividends while they waited.
A lot of investors jumped ship during that time and lost out. On the flipside, their shares were bought by investors who saw an opportunity to pick up otherwise good investments that had just taken a temporary knock due to the climate of fear.
Buying when the herd is selling can be a smart move, (but not always, UK bank shares are still way down on their pre-crisis peak).
A regular savings habit is a good way to stay on track with your wealth goals, but it also lets you take advantage of the ups and downs in the market. When markets fall you automatically benefit by getting more shares or units for your money.
This is known as ‘cost averaging’ because it can considerably lower the average price you pay for your investments. And, if you buy when prices are low, you reap all the rewards if they rise again.
With the threat of trade wars, real wars, climate emergencies and Britain’s eventual exit from the European Union, 2020 is shaping up to be a tumultuous year too.
This makes it harder, but just as important, for investors to stay focused. Just like avoiding investing altogether, jumping in and out and of the market at every sign of trouble can cost you money.