5 practical things you should do when markets are volatile

17/03/22
Investments

An exterior shot of the Bank of England building

Global markets have proven volatile since the start of 2022 because of the Russian invasion of Ukraine, the persistence of the Covid-19 pandemic, and high inflation.

As an example, Forbes reports that the value of the American S&P 500 fell by 8.5% between its 2021 closing date and the end of February 2022. Forbes even expect the S&P 500 to lose a further 10% to 25% of its value this year.

It can be difficult to know what to do during periods of market instability. So, read on for five practical tips to help you effectively deal with market volatility.

1. Be patient

Stock markets can be volatile and unpredictable. Volatility is effectively the price paid for the superior returns that investing in the markets have delivered consistently over long periods of time.

During periods of heightened uncertainty, it usually pays to be patient and to avoid making impulsive decisions.

Though the past performance of a share or market is not necessarily indicative of the future, history has shown that stock markets tend to recover from periods of uncertainty.

Many recent events that have caused increased market volatility, like the 2000 dot-com bubble or the 2008 financial crisis, have been followed by an even stronger recovery.

History shows that holding your nerve as an investor and not reacting to events as and when they occur is often the most successful strategy for dealing with short-term market volatility.

2. Don’t panic-sell

After a downturn, you may want to mitigate your losses by selling, but doing so eliminates the possibility of benefiting from a recovery.

A share performing badly for a few months or longer doesn’t necessarily mean that it won’t rally and improve in the future.

Here’s an example. One of the immediate effects of the first national lockdown in spring 2020 was that the UK stock market fell sharply. Between 21 February 2020 and 23 March 2020, the value of the FTSE 100 fell by just under a third.

Had you sold your investments at the bottom of the market, you’d likely have crystallised a significant loss.

However, had you remained patient, the FTSE 100 had recovered to its February 2020 level by the winter of 2021 – less than two years later.

Source: London Stock Exchange

The lesson here is that, over time, markets typically recover. Of course, past performance is not a reliable indicator of future performance.

3. Make sure you are diversified

Diversification in your investments is crucial, as it avoids “putting all your eggs in one basket”.

Having a well-diversified portfolio, spread over a wide range of companies, sectors, and geographical regions, helps to ensure that a downturn in one area can be balanced by growth in another.

One of the key benefits of working with a financial planner is that they can ensure you have the right asset allocation. For example, we’ll ensure your investments are well diversified, and in accordance with your tolerance for risk.

4. Consider increasing your holdings after a market downturn

While market volatility may make you understandably nervous, it can also prove to be an opportunity for keen-eyed investors.

A market downturn usually reduces share prices across the affected industry or market. So, it can be an opportunity to invest at lower prices, potentially leading to growth in the future.

Investing amounts regularly in the market can see you benefit from “pound cost averaging”. Here, the cost of the shares or units you buy will vary based on the price paid at the time.

If the value of shares or units falls from month to month, your regular investment may buy more shares or units. If the price then recovers, you can benefit from an improved return.

5. Seek financial advice

If you’re concerned about investing during periods of volatility, consider speaking to a financial planner.

We can act as a sounding board that can help you avoid making any knee-jerk decisions that could damage your long-term financial future. We can also help you to build a diversified portfolio and financial plan designed to meet your goals.

For more information on how we could help you or to book an appointment, please email info@investmentsense.co.uk or call 0115 933 8433.

Please note:

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.