Investment articles:
Keeping calm, carrying on

Why holding your nerve when the going gets tough could pay off in the long term.

2018 was a challenging year for investors with money in shares and investment funds. Stock markets around the world suffered from turbulence as a result of economic and political uncertainty, ranging from the US’s increasingly protectionist trade policies to the Brexit negotiations.

Monique Wong, senior portfolio manager at private bank Coutts gives her tips for dealing with volatile markets.  

2018 saw two corrections – defined as a fall in value from a previous peak of 10% or more – on major global markets, whereas in 2017 there were none.

For investors seeing markets fall it can be tempting to sell in the hope of avoiding the worst of any losses. But this approach is likely to be the opposite of a productive strategy, according to Wong.

Monique Wong says...

“As a long-term investor, when you see the kind of volatility we have had recently, you should consider holding your nerve and stay invested.”

“If you miss out on the best days in the market, it eats into your returns: and some of the empirical work we have looked at shows that over the last 20 years, if you had missed out on the 10 best trading days – many of which have come immediately after significant falls – you would have halved your returns. This kind of everyday choppiness is the cost of investing in markets, and hopefully benefiting from higher long-term returns."

Investment is a long game

All of the strategies we run are meant to be with investment time horizons of five years or more.

It is for this reason that investing in shares is better suited to long-term goals such as saving for children’s university fees or for your own retirement. If you invest money that you might need access to within a year or two, you run a greater risk of having lost some of your capital when you come to cash in.

With a longer investment timeframe, your shares or funds have more opportunity to ride out any periods of low or negative growth and return to positive territory.

Cashing in investments after they have fallen in value crystallises the loss.

Another approach

Investors could also benefit from another approach that could help to reduce the impact of volatility. By drip-feeding money into an investment fund or share portfolio on a monthly basis, for example, it is possible to take advantage of a concept known as pound-cost averaging.

This means that, if the market has just fallen, the money you put into a fund will buy a greater number of units. On the other hand, of course, if values have been rising, your investment will buy you fewer units.

Overall, however, the effect should be to smooth out – to some extent – the peaks and the troughs, and help mitigate some of the volatility and risk that is part of investing.

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