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Article | 30 March 2018 | Investments
Given how hard it is to predict market volatility it is better to focus on things you can control.
Volatility has returned to markets in 2018 and given investors a bit of jolt. Many were lulled into a false sense of security in 2017 as markets took everything in their stride with even rising tensions between North Korea and the US unable to knock investor’s confidence.
2017 was the exception, not the rule, as volatility is a natural, and indeed useful, part of investing. Volatile markets can cause unnerving headlines but they can also present opportunities for investors.
The key is to consider what an increase in volatility actually means to the investor and how it could affect their life and their plans.
Firstly in the short term it can put investors off as they become naturally concerned about losing some of their hard earned money and possibly feeling foolish for investing in volatile periods. Losing 5 or even 10 per cent in a matter of weeks is not pleasant.
However, investing is all about the long term and if you focus on that then in 5 or 10 years’ time none of this will be remembered. Such falls as we have seen in February and March don’t even register on the long term performance charts of stock markets, so we shouldn’t be overly concerned about recent sell offs and look at them more positively as opportunities.
It is clear that the timing and extent of any market sell-offs are incredibly hard to predict. The consensus view was that synchronised global growth would continue and support markets. Whilst that view hasn’t been shattered, risk has certainly returned and investors’ perceptions and attitudes have shifted.
Given how hard it is to predict market volatility it is better to focus on things you can control. In volatile times it helps to maintain a focus on the bigger picture. A reminder of your investor’s goals and the time over which they are looking to achieve it can help put short term volatility in perspective.
There are still lessons to be learned from any market sell offs and the most important one is to ensure you are well diversified. By holding a broad range of assets and investing globally, investors can help to minimise the effects of a market sell off and reduce the risks they are taking. If their portfolio moves around more than a major equity market, such as the FTSE 100, then they need to consider diversifying their portfolio. Make sure they also hold investments which can protect capital in the tough times.
Finally, don’t tinker. This is probably the hardest thing for investors to avoid, but trying to second guess markets when they become volatile is dangerous as they can quickly get out of sync with the market and take increasing risks to recover losses. Better to ride out the storm and stay invested, using their ISA and SIPP allowances to take advantage of a sell off.
Holding a bit of cash, ready to invest if markets were to sell off, can be beneficial but it is important to remember that you could also miss out on stock market growth whilst you wait for any correction.
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