Chase de Vere, the independent financial advisers with offices in Manchester, comments on investment strategies to cater for volatile stock markets.
Patrick Connolly, Certified Financial Planner, Chase de Vere, says:
- Stock markets have fallen heavily in recent days, impacting on many people’s pensions and ISAs
- However, this needs to be put in the context of a nine-year bull run which has seen many investors make large gains in their investment portfolios
- It’s usually fine for younger investors to hold more of their money in shares, especially if they’re paying monthly amounts into their pension or ISA. However, as you get older and the value of your investments grows, capital protection becomes as important as capital growth
- The best way to protect your money is usually through asset allocation, where you hold other investments such as fixed interest and property alongside shares. This helps you to spread risks.
- Some investors are taking too much risk in their portfolios, but also many people go too far and take too little risk. Somebody aged 60, who is in drawdown for example, could live and be invested for another 30 years or more. If most of their money is in cash and fixed interest, its value is likely to be eroded by inflation over time, especially if they’re taking income from it.
- You are likely to rely on your pensions and ISAs. The investment choices you make with them are too important to get wrong. It is therefore essential to get the right independent financial advice, especially as your fund sizes grow and as you approach or move in to retirement.
Investment strategies for volatile markets
Multi Asset approach
- Nobody can consistently predict which asset classes or sectors will perform the best. It is therefore important that investors don’t try to be too clever
- Having too much money in one area that under-performs can have a significant negative effect on your overall finances
- You should therefore spread your money across different assets such as equities, fixed interest, commercial property and cash, but make sure this is in the right proportions to meet your objectives and attitude to risk.
Stay calm and relaxed
- 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.
- Brave investors may see stock market falls as an opportunity to buy
- Despite the economic problems in different parts of the world, many companies continue to perform well, make consistent profits and have large amount of cash on their balance sheets. It is now possible to buy many of these companies at a lower price
- However, if you do buy more you need to understand that markets may fall further before they start to recover.
- Investing regular premiums (rather than lump sums) is a sensible way to invest during difficult times and 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 the average purchase cost.
- 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.