How to Cope with Stock Market Volatility
Media hype about stock market falls can make even the most calm and collected investors start to feel nervous. When stock markets experience volatility, it can be easy to panic and make decisions that you might end up regretting, as this client story highlights...
Kerry and Dan had secured lucrative contracts overseas and were earning five times the amount they needed to cover their living expenses. They had invested the excess in a high risk investment linked savings plan. They were keen to secure the maximum growth possible and were both comfortable with risk, having taken it on numerous occasions in the past.
All was going well until the credit crunch hit in 2008. The value of their investment plummeted from £150,000 to £75,000 almost overnight. The couple called me in a blind panic, saying, ‘Sell, sell, we’ve lost everything.’ I convinced them to hang tight, which they did for a day. The value fell further and they pulled out of their investment, realising a loss of over £80,000 on the value their portfolio had been less than a week previously.
If they had kept hold of their investment it would have bounced back. In fewer than six months the value would have been above where it had been before the crash.
Market timing is the strategy of buying or selling financial assets by attempting to predict future market price movements. Typically, investors trying to time the market fail. They buy too late and sell too early, missing out on the most significant growth and realising the biggest losses.
Identifying what you want your investment to do for you, investing it in an appropriate risk environment and holding a position for the long term is the most advisable course of action, but it must be a position you feel comfortable with. Even if markets appear to be falling to records lows, taking your investment with them, you need to be comfortable with sitting on your hands and avoiding the urge to cash out.
You will probably remember all the warnings that you were given when you made your investment – in particular that the value of your investment may fall as well as rise. Market wobbles are part and parcel of investing in the stock market so try not to panic when they occur.
Remember that investments tend to outperform cash over a longer period. Look past any short-term fluctuation and focus on the future.
It is always possible that you could get back less than you invested depending when you take your money out, but unless you need quick access to your capital within a short-timeframe, the best course of action is to ride out these market fluctuations and focus on your long-term investment objectives.
A Market Correction Presents Opportunities
A stock market correction can present a good opportunity. Many assets may become undervalued – so they represent a bargain. If your investment is being managed effectively, your fund manager(s) should be able to identify opportunities to purchase assets that are undervalued which could result in significant gains when markets start to rise again.