An unanticipated spike of volatility in the financial markets can often be a worry for investors. It’s only natural to be tempted to pull out of the market when everything seems to be coming crashing down.
Table of contents
- What is market volatility?
- Is it worth getting financial advice?
- When is the best time to invest?
- How long should I invest?
- What should I invest in?
- Our top tips for investing through volatility
- Related Information
But it is crucial for investors to remember that volatility, even at its most intense, is a natural and normal part of the market process- one that carries with it a range of potential buying opportunities for the savvy investor.
In this short guide, we have answered some of the questions that often arise in volatile times to help you better understand the opportunities available to you.
What is market volatility?
Market volatility refers to when a market experiences periods of unpredictable, and often sharp, price movements. The bigger and more frequent the price swings, the more extreme the volatility.
Volatility reflects investor sentiment, which can be driven by any number of economic or geopolitical factors.
Is it worth getting financial advice?
A financial advisor is your ally when it comes to helping you manage your financial strategy through all market conditions.
They will work with you to understand your unique circumstances and priorities and develop a tailored plan to help you achieve your financial goals.
This can help you to stay focused on your long-term aims without getting distracted by any short-term market changes and can give you the peace of mind you need to ride out bouts of instability.
When is the best time to invest?
A financial advisor will help you determine when the best time to invest. As any good investor knows, volatility creates opportunity.
A wildly volatile market means that there will be times when solid businesses will be valued at artificially low prices, creating excellent opportunities to buy quality assets at a reduced price. In general, the earlier you invest the better.
Reinvesting your returns – known as compounding – can help grow your wealth quicker, and just a few years’ difference can have a huge impact on the result so start investing as early as you can.
How long should I invest?
Lots of people think that knowing when to buy and when to sell is the secret to investing success. But the reality is that history has time and time again shown that those who try to time market movements don’t receive the best returns.
Too often, we end up buying high and selling low, as we respond too late in a cycle. It is far more effective to use the time to your advantage – the longer your horizon, the more likely you are to achieve your financial goals and ride out any short-term drops.
What should I invest in?
It is almost impossible to entirely remove risk from investing. But the next best thing is to mitigate some risk by picking a range of assets that are likely to perform differently under the same market conditions.
This is called diversification and it can help you to iron out the ups and downs of the markets.
Diversified, multi-asset portfolios have historically proven to produce positive returns for investors so if you are in the middle of a bout of volatility, take the opportunity to bolster and rebalance your portfolio.
Your financial advisor can help make sure you have a robust, strategic asset allocation that will help you manage volatility and enhance returns.
Our top tips for investing through volatility
During periods of volatility, it can be tempting to leave the market but missing even just a couple days of positive market movement can have a huge impact on your overall return. History shows that typically, you are better off staying invested and riding out the storm so that you can benefit from the potential rallies and upturns in the market.
Maintain a long-term outlook
Investing with a long-term outlook is a great way to reduce the impact of short-term stock market fluctuations. The financial markets are amazingly resilient and will recover from even the biggest hits. What might seem like a portfolio-crushing crisis right now will end up just being a bump in the road in the long-term.
Balance your portfolio through diversification
While it is virtually impossible to invest entirely risk-free, diversification is the closest you can get. Diversifying your portfolio increases the chance that a drop in the value of certain assets will be made up for by a rise in others. Making sure your portfolios are balanced and diversified is the best way to secure positive returns in the long term.
Periods of volatility can be disconcerting, but it’s crucial that investors remain calm and maintain a long-term view.
Seeking financial advice may well be the best thing you can do to ensure you are well-positioned to ride out the storm and capitalise on the upturn.
Your financial advisor will work with you to understand your specific investment objectives, time horizon and attitude to risk to find the portfolio that is best for you.
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