The stock market always has its ups and down, but the past 15 months have been some of the most turbulent ever. There were dramatic falls this time last year as the extent of the pandemic became clear and lockdown became the only solution. The falls were followed by rapid return to growth, and now, with vaccination programmes across the world, we could be set for a boom as recovery begins in earnest.
If you are a new investor, you may be bewildered by it all. At Continuum we are looking at how to deal with a turbulent market.
Don’t try to time the market
The stock market is volatile. However, trying to take your money out before it falls and putting it back in when it has fallen may be a recipe for disaster. This is known as timing the market and although it sounds like an obvious strategy in theory, it is virtually impossible in practice.
Because the stock market is so volatile, consistently predicting how it will behave on any given day is beyond even the sharpest investment professionals. In fact, investors who try to time the market buying and selling their holdings based on technical indicators or economic data tend to underperform buy-and-hold investors.
There are three reasons for this. Firstly, buying and selling means transaction costs; trading more often erodes returns. Secondly, selling in a panic when the market bottoms out means crystalising your losses (and if you don’t make a loss, it could still leave you with a capital gains tax bill if your investments are not inside an ISA). Thirdly, when the market goes back up, it will be more expensive to buy your way back in than if you had simply stayed invested – so you lose out again.
Adopt a buy-and-hold strategy
Markets have ups and downs, but historically, the gains have always outperformed the losses. This is why most advisors recommend a buy-and-hold strategy: to allow your investments in the stock market to roll with the punches, and recoup losses over time.
This means that you’re invested in the market for the long haul, ignoring the frequent ups and downs instead of trying to predict them. This long-term strategy makes it easier to stop worrying about short term and even daily fluctuations due to changing interest rates, oil prices, politics – and focus on investing to achieve your long-term financial objectives.
For the average investor, making a set investment every month is a good idea. This technique is referred to as pound-cost averaging. The same cash amount buys you more stocks when the market is low and less stocks when it is high, meaning that you automatically take advantage of low prices.
Diversify and rebalance
Some stocks may demonstrate remarkable growth, while others may plod along. The problem is that you have no idea which will race past the rest of the market and which will be left standing. A diversified portfolio, made up of a variety of shares, from a number of sectors and ideally from different markets around the world may be a better idea. When one business or even an entire sector hits a downturn, the chances are that another holding will still be providing the returns you are looking for.
But spreading your bets with a diversified portfolio is only part of the story. Your holdings should reflect your attitudes to risk and your needs, which change over time. A high risk, potentially high growth stock can make up part of your portfolio when you are young and have plenty of time to make up any losses – it is less appropriate when you are close to retirement and investing for steady income.
Investment expertise is valuable. As a Continuum client, you can call on the skills of our experts, and additional features like our online portfolio. Contact us to find out more
Get professional help
Getting professional help can be a big advantage when you are dealing with any investments – and especially in turbulent times. At Continuum we will work with you, first establishing a financial plan based on your age, income, lifestyle requirements, attitude to risk and your projected goals. Then we will find the stocks or funds to put that plan into action.
If you already have a portfolio, we can help you look at it with fresh eyes, and with rebalancing it to deal with the new realities of a post-covid world.
To find out more, simply contact us.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
When investing your capital is at risk.
The value of an investment can go down as well as up. Past performance is not a guide to future performance.