Investment markets tend to move in cycles, from boom periods when assets rise in value and deliver strong gains, to events like the global financial crisis when assets fall in value and generate losses for investors.
This “volatility” can be unsettling for investors, and whilst there is no foolproof way to manage market highs and lows, following some basic strategies can help.
Diversifying your investments across different asset classes can help shield your portfolio from market volatility.
Asset classes typically behave differently at different times. Some investments will rise in value while others fall. For example, when interest rates are low, share and property values may climb. Spreading your money across a variety of investments means you are less likely to wear the full brunt of a fall in one particular asset class.
During periods of intense volatility, it can be easy to become too focused on day-to-day market movements. This can lead to knee jerk reactions bought on by concerns over falling asset values.
These sorts of responses are understandable but it is also important to keep your eyes on your longer term goals. If your longer term goals and your circumstances haven’t changed, there may be less reason to change your investment strategy in the short term.
When markets drop for a prolonged period, you may feel as though investment losses are piling up, and be tempted to bail out altogether.
At these times, bear in mind investment markets tend to be cyclical and quality assets, like some shares, that drop in value today, may well recover its value – and go on to achieve even greater gains in the future. Selling out during a low will mean those paper losses will become real losses. And you will be forced to pay more to get back into the market at a later stage if these values recover.
At most times in life, we try to buy when prices are down and sell when they are high. It makes sense to take the same approach to your investments. When markets hit a downturn and values are lower, investors can look to take advantage of the opportunity to buy into quality assets at reduced prices.