Investment volatility: Should you respond?


Over the course of 2019, your investments may have seen a lot of volatility. Caused by uncertainty and tensions that look set to continue into 2020, it’s likely to be a similar picture over the next 12 months too. Whilst it can be tempting to think you should react to investment values rising and falling, sitting back and thinking about your long-term financial plans is often the best course of action.

There are numerous reasons for volatility, with many outside factors affecting the value of a company. This year has seen Brexit, a trade war between the US and China and the protests in Hong Kong has an effect. There’s little you can do about these effects and they’re impossible to predict with consistent accuracy. So, what can you do about them?

As you can’t control external factors, you need to focus on your investment portfolio. Often, you shouldn’t react to investment volatility, but there are things you should keep in mind.

1. Remember your long-term objectives

It’s important to keep in mind why you started investing and what the end goal was. You shouldn’t invest with a time frame of less than 10 years in mind. This provides an opportunity for the peaks and troughs to smooth out. When you look at short-term volatility with a long-term perspective, it should have little impact on your ability to reach goals. Keeping this in mind can provide some perspective.

2. Evaluate long-term performance

Your investment might have fallen in value over the last couple of months or even the last year. But you need to take a longer-term view of evaluating investment performance. When you take a look over the last five or ten years, it’s likely your investment has delivered returns. The long-term gains should outweigh the short-term dips experienced. If your investment portfolio is still relatively new, it can be difficult to look at it this way. Focussing on projected gains over an extended period can help you see the bigger picture.

3. Try not to view values too often

Do you find that you’re often checking the performance of investments? It can be tempting. But, if possible, it’s usually a good idea to set up your investment plan and then try to forget about it until a review point. This can help you tune out the short-term volatility that investment may experience.

4. Review risk profile

It’s important that you feel comfortable with your investments, this includes the amount of volatility experienced. Reviewing your risk profile can help. As a general rule of thumb, the greater the risk you take, the higher the potential returns. But on the flip side of this, you also have a greater chance of the value of your investments decreasing. When building an investment portfolio, your tolerance for risk should be assessed. This should look at numerous different factors, including your goals and other assets. Understanding the level of risk you’re taking can help you feel more comfortable with volatility or prompt a review of your current risk profile.

5. Ensure your portfolio is adequately diversified

All investment portfolios should be diversified. This means investing in a range of different assets, industries and geographical locations. The theory behind this approach is that when some assets see values fall, others will rise. This can help smooth out the overall performance of your portfolio.

6. Keep in mind values falling are ‘on paper’ until you sell

When you see the value of your investments fall, it can feel like you’ve made a loss. But remember this is just a ‘paper loss’ and isn’t realised until you sell the asset. As a result, making a snap decision to sell can mean you realise a loss and miss out an opportunity for the value of assets to rise again.

7. Make adjustments where necessary

There’s nothing wrong with adjusting your investment portfolio. However, these should be carefully considered rather than a knee-jerk reaction to short-term volatility. Any adjustments you make should consider your long-term goals and the other investments you hold. Simply selling off an asset that’s performed poorly over the short term could affect your overall portfolio diversity. Don’t make an investment decision in isolation but look at your wider financial plan and the potential long-term impact.

If you’re worried about your investment performance, please contact us. We’re here to help you have confidence in your long-term financial security, including the role investments, will play.

Please note: The value of your investments 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.