Whether seeking income, growth or both, there are some basic rules to follow
Volatile financial markets are an inevitable part of investing. On a day-to-day basis, the swings in stock market prices can be significant. However, over the longer term, things have tended to smooth out, with daily volatility having a lower impact on overall portfolios.
That said, while this has happened in the past, it may not necessarily happen in the future. In the short term, market fluctuations like we’ve seen recently can be unnerving and make you ‘feel’ as if you’re losing money. That’s why it’s crucial at times like this that you focus on staying calm and taking a long-term view, avoiding locking in short-term losses, and making sure you’re properly diversified.
While it’s true that whenever you invest you need to accept that you could get back less than you paid in, worries during turbulent markets can mean it’s easy to take a short-term view and effectively cheat yourself out of a potentially better performance. If you can keep your composure and take a long-term view, you’re much more likely to meet your all-important financial goals, as these three golden rules highlight.
Keep calm and take a long-term view
Why is it so important to take a step back and keep the long term front of mind? Does it really make that much difference? ‘Yes’ is the short answer. Attempting to time the market can be a high-risk approach, especially when compared to making ongoing regular investments. If you think it could be an opportunity to invest while share prices are lower to potentially make higher returns over the long run, just be mindful that prices may fall even further and that past performance isn’t a reliable indicator of future returns.
Avoid locking in short-term losses
During market falls, it’s quite likely you’ll be tempted to sell some of your investments and keep the money somewhere ‘safer’. But if you do, it means you’re likely to be selling after markets have already fallen – and, crucially, before they rise again. That means you lock in your loss.
Although it’s tempting to take your money out when markets fall, it’s not normally a good idea. It is also almost impossible to distinguish between a genuine imminent crisis and a mere market wobble over an event that ultimately proves far less serious than anticipated. As a result, investors who spend too much time waiting for the right moment to invest may miss out on many of the gains.
As ever, make sure you’re properly diversified
A diversified portfolio and a focus on the long term are often better defences than trying to time the market. Periods of market volatility are a valuable reminder of the importance of diversifying – of spreading your money across different types of investments, geographical locations and industries.
If you’re investing in only one or two of these, then you’re actually exposing yourself to quite a degree of risk. But if you diversify across investments, it can help you achieve a much better balance between risk and return. It’s so important that you regularly check where you’re invested – across Individual Savings Accounts, pensions, shares – to make sure you’re diversified.
What about your pension savings?
If you’re still some years from retirement, your pension savings will have time to recover from any short-term losses. Even if you’re getting nearer retirement or are already retired and relying on your investments for income, you shouldn’t panic. There are things you can do to help shelter your pension savings from the worst of any market volatility.
If you’re getting closer to retirement, make sure you’re in investments that will get your money to where it needs to be by the time you retire – whether that’s buying an annuity, taking it all out as a lump sum or keeping it invested and taking a flexible income.
Make your money last your retirement
If you’re already retired, there are ways to help protect your money not just from market volatility but throughout your retirement.
A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.
YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.