Staying disciplined and sticking to your plan is key
The overall direction of developed stock markets is a relentless and continual rise in value over the very long term, punctuated by corrections. It’s important not to let global uncertainties affect your financial planning for the years ahead. Individuals who stop their investment planning, particularly during market downturns, can often miss out on opportunities to invest at lower prices.
Such volatility is less of an issue if you take a longer-term view. It’s important to stick to your strategy and keep moving ahead consistently by spreading risk and growing your wealth. But it’s volatility in stock markets that make investors nervous. However, on the flip side, not all volatility is bad, for without volatility stock prices would never rise.
Focus on long-term horizons
Trying to second-guess the impact of events such as Brexit or a stock market correction rarely pays off. Instead, investors who focus on long-term horizons – at least five to ten years – have historically fared much better.
At the time of writing this guide, the UK Government had left the European Union (EU) at midnight on 31 January 2020 and is now in a transition period until 31 December 2020.
Foreign currency exposure
Political uncertainty and various other factors such as exchange and interest rates can all impact how investments perform. However, for some investors, the Brexit vote has up until now been good for their portfolio’s performance, as some have benefited from foreign currency exposure.
During any period of change, it’s important to be able to obtain professional financial advice and feel comfortable that your investments are robust enough to deal with any potential volatility and – which is key – that they include a diverse mix of assets.
Economic cycle performance
Among so much uncertainty surrounding the UK’s departure from the EU, conventional pricing of company shares has been turned on its head. This is not to say that all UK stocks have fared badly. On the contrary, many large companies that derive most of their earnings from overseas have outperformed, as have those seen as defensive stocks that are widely expected to hold up well throughout the economic cycle.
It is often said that quality is not about any single metric, but a blend of characteristics that allows companies to deliver growing value for shareholders over time. A quality company should, among other things, be able to deliver sustainable growth with a healthy balance sheet and strong corporate governance.
Brexit, for all its unintended consequences, has opened up rare possibilities to buy stakes in quality companies at attractive valuations. By comparing share prices to company earnings, UK stocks overall have looked less expensive than their counterparts elsewhere in the world – especially in the US. The abandonment of logic in the face of short-term concerns over the UK economy has created particularly fertile hunting grounds for some long-term investors.
It also remains too early to understand fully how Brexit may affect the cost of imported goods years from now, as so much depends on trade agreements reached between the UK and the EU, and other countries. If the pound’s weakness persisted, the cost of other imported goods would also rise.
But despite periodic and unavoidable corrections, stock markets tend to recover over time. The worst thing to do is sell out of the market. Long-term investors need to take a pragmatic view about volatility and the subsequent opportunities. Of course, it is tempting to think that cash is the best place for long-term savings, but if investors embrace opportunities and avoid panicking, then market corrections can become a friend.
It’s important to remember that no matter how big a market correction, gains made during periods of recovery that follow generally outweigh any losses. No one can predict exactly what will happen in 2020 and beyond, but we can safely look to history and take some comfort from the knowledge that markets are resilient. Short-term bear markets may be painful, but bull markets are very rewarding for those who hold their nerve.
Protecting your investment portfolio
Volatility, risk and market declines are a normal part of the investing cycle, but the media likes drama. Reports will use words that make these market fluctuations sound alarming, so be cautious about reacting to the unnerving 24/7 news cycle.
If you have a well-diversified portfolio, then it’s more important than ever to stay the course. You have a strategy in place that reflects your risk tolerance and time horizon, so stay committed. However, if you reacted and sold in a previous market decline or have not implemented a strategic asset allocation, then now is the time to have a discussion about your investment options.
The first thing to do when volatility is high is to stay calm. It can be easy to work yourself up into a panic when stocks are falling, but this won’t help you. Making calm, rational decisions is one of the keys to long-term investing success. Remember – you haven’t actually lost money until you sell. The chances are that stocks will recover, as they have historically done in the past.
No one knows how severe any market turbulence will be or what the market will do next. It could be over quickly or linger for a while. But no matter what lies ahead, proper diversification and perseverance over the long term are what’s most important.
Taking a strategic approach
Sensible diversification – owning a mix of assets, including shares, bonds and alternative investments such as property – can help protect against uncertainties over the long term. When one area of a portfolio underperforms, another part should provide important protection – and it’s never too early or too late to start taking this considered and strategic approach.