How to protect your investments in uncertain times

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Make sure you have some cash to hand while you diversify and sensibly rebalance your portfolio, and don’t be afraid to take professional advice to help see you through the storm, says Leonid Nji, group head of research at AFH.

Last year was one to forget for investors, with UK and US stock markets posting their worst annual performance since the global financial crisis.

The factors that spooked markets so badly in the second half of 2018 –  uncertainty over Brexit, rising trade tension between the US and China, and fears of a global economic slowdown – show no signs of going away just yet, making the outlook for the next 12 months uncertain at best.

Holding shares, bonds and other assets in such a volatile climate can be an unnerving prospect. But returns on cash savings remain near historic lows because of low interest rates, with inflation outstripping returns.

Here are some of the best ways to ensure your investments remain as safe and secure as possible during uncertain times.

Diversify, diversify, diversify

After the stock market rout of 2018, it is worth remembering yet again that various asset classes react differently to events, and investing in a combination over the long term is by far the most sensible approach.

Such a diversified portfolio, with a combination of assets such as shares, bonds, property and commodities – either held directly or within a fund – will not protect you entirely from market falls in uncertain times, unless you are extremely lucky, but will deliver a more even return over time.

Make sure also to diversify within those asset classes. For example, consider whether your portfolio has a decent mix of shares in large and small companies across a broad range of sectors. And investing across multiple geographies will help soften the blow from region-specific economic threats such as Brexit.

Take advice when you need it

Professional investment advice comes into its own when markets are volatile. A financial adviser will be able to help build a portfolio that not only meets the long-term needs of individual investors but is also robust enough to weather storms along the way.

Many advisers will be supported by a team of investment experts who monitor market fluctuations daily.

Advisers will also help take the emotion out of money management for alarmed investors, helping them know when to sell and when to hold investments, and when a rebalancing or a change of strategy is warranted and how to go about it.

Clarify your attitude to risk

One of the key functions of a financial adviser is to help you understand your appetite for risk, something that is even more important to get straight if you are taking a more DIY approach to your money.

Your attitude to risk may seem high when markets are performing well, but many people discover, in times of volatility, that they are less comfortable with the fluctuations of the market than they expect.

Ensuring that you are investing at a risk level comfortable for you, and understanding the risk level of each of your investments, is critical at the best of times – and all the more so during periods of uncertainty. If you are not working with a financial adviser, this guide from the Money Advice Service will help you get started.

Rebalance, but only when necessary

When markets are volatile, it is easy for the underlying assets in your investment portfolio to change value and become skewed or unbalanced. For example, you might have set out to have a certain percentage of your portfolio in the technology sector and another proportion in the leisure industry.

However, if your investments in the two sectors perform in a radically different way, you may find that the percentage of your portfolio in each sector is higher or lower than you had planned.

Rebalancing simply involves selling assets in areas where you have ended up with too much, and buying more in areas where you have too little. This rebalancing can ensure that you are not taking on a level of risk that you have not planned on, by exposing too much of your portfolio to a single asset sector or geographical area.

Nevertheless, such rebalancings – which require a level of investment knowledge and experience – should be done selectively and infrequently, and in most instances is best done in consultation with a financial adviser.

Do not be tempted into simply selling when an individual asset or portfolio suddenly loses value; longer-term gain remains the name of the game, so focus instead on the horizon rather than on what is happening today.

Working with a financial adviser may help you to ensure there is no duplication across asset classes, or over-representation of certain geographies, sectors and companies.

Invest regularly

A simple way to manage risk in uncertain times is to invest smaller sums at regular intervals rather than waiting for the right market conditions to make a larger investment commitment.

Regular investment has several advantages. The first is that you will benefit from a phenomenon known as pound cost averaging, which means that if you put the same amount of money in each month it will buy more units of your investments when the market is lower and fewer when the market is higher. This can help to smooth out volatility.

Another advantage to regular investment is that it removes the very human tendency to try to time the market, resulting in poor investment decisions.

Behavioural economists such as Richard Thaler have looked into the way we invest, and discovered that we suffer from a number of thinking errors, or cognitive biases, that mean we often invest at the wrong times.

Such biases include loss aversion, where we fear loss more than we enjoy gains, and the disposition effect, where we tend to hold on to assets that have dropped in value.

Automating the process with a regular investment amount can stop these thinking errors from affecting our decisions on when to buy and sell when the markets are volatile.

Do not ignore safe havens

Particularly in uncertain times, including assets in your portfolio may help to protect returns.

Assets that may be perceived as safe havens include government bonds, known as gilts in the UK, and even highly rated corporate bonds, which tend to be more stable than company shares. Once again, an adviser can help you select the appropriate investments to provide the necessary balance.

Keep some cash to hand

It is always important to have a cash buffer so that you are not reliant on investment performance in the short term. This is especially the case in such volatile times. You do not want to be in the awkward position of needing to liquidate your assets at just the wrong time.

Experts typically suggest investing for a minimum period of five years, and statistics show that volatility decreases dramatically if you hold your assets for longer than this. Having cash to deal with short-term needs will take much of the worry out of riding the stock market rollercoaster in uncertain periods.

The suitability of investments is based upon individual circumstances. Past performance is not a guide to future performance. You should contact a financial adviser before proceeding with any course of action.

This article was originally published on The Telegraph website on 28 January 2019.

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