This remains a tough period for investors. Rising geopolitical tensions have prompted significant market volatility. After a period of near-uninterrupted growth, markets now need to adjust to a changed climate, where interest rates and inflation are rising
and the outlook appears less certain. Investing today may feel like a test of nerve, but there are ways to navigate these difficult times.
Before you hang up your investing hat, it is worth remembering that periods of volatility are inevitable. Markets rise and fall, often without a lot of rhyme or reason. Since 1946, there have been
84 declines of 5% to 10% in the S&P 500 – roughly one a year. While these feel uncomfortable at the time, the market usually bounces back in a matter of months. These ups and downs are part and parcel of stock market investing and shouldn’t be cause for
alarm.
More severe declines happen far less frequently, and markets usually take longer to recover. Since 1946, there have been just three declines of 40% or more. Investors have had to wait a while for markets to recover their previous value, but they have always
recovered in the end.
This type of decline is common in individual stocks too, but drawdowns are normal and they don’t necessarily impair your long-term return.
What to consider when investing
Even if some market ups and downs are ‘normal’, it can still be unsettling. There are ways to balance out the highs and lows. In particular, regular saving is your friend. It means that you buy in at a variety of price points, which smooths out your return
over time. It also makes it easier to invest through hard times. You don’t have to fret about whether now is the right time to buy or sell, whether the market is heading higher or lower, you just invest the same every month in all conditions. It’s refreshingly
simple.
It is also worth noting that time in the market is important. Missing the best trading days in markets can significantly dent your return over time. Research by Franklin Templeton shows that missing the top 10 days in markets would have
dented your returns by 110% over the 10 years following the Global Financial Crisis.
This is because sharp sell offs in markets are often followed by sharp recoveries. If you panic and sell out, you’ll almost certainly miss the bounce. The best example would be the Covid sell-off where markets dropped and then rose very quickly. Investors
who had sold out, waiting for the Covid situation to resolve, would have missed the rebound and crystallised their losses. Markets had recovered long before the vaccine was found.
The importance of balance
The recent market volatility has thrown up some other anomalies. It has brought an end to the vogue for technology assets, for example, with a significant sell-off for many of the world’s largest companies – Google, Meta and Netflix. In contrast, it has
seen a revival for many of the fossil fuel companies, which investors had been avoiding because of their poor environmental credentials. The market mood can change swiftly and when investors are least expecting it.
Trying to find the right moment to switch between styles is tough. Before the recent rout, technology had looked expensive, but it had looked expensive for some time. The earnings for the major technology companies were still buoyant – it would have been
very difficult to predict the turning point. Maintaining a balanced portfolio – across countries, across sectors and across investment styles – is usually a better approach, particularly if market volatility makes you nervous. That way, one part of your portfolio
will be doing well even if another part is doing badly.
The cash conundrum
When investing in tough times, the temptation is to hide in cash. It feels instinctively safe – you get back the same amount as you put in – and now may even look attractive, with the highest rates we’ve seen in more than 10 years. The problem is that, with
inflation running at 10% and expected to hit 11% later this year, the real value of your capital has dropped significantly.
As such, when you’re looking at volatile markets, it is worth remembering that the alternatives may be worse. You can take money out, but where does it go? Savings rates may have risen a little, but not enough to compensate for the rising cost of living
to any significant degree. It is better to stay in the market and find ways to manage the volatility than come out and watch the real value of your capital eroded.
You also need to keep an eye on costs. At a time when investment returns are harder to come by, you need to be careful on how much you’re paying to invest.