Dealing with volatility

This winter is likely to bring more of the same, depending on the trajectory of the Covid-19 pandemic, possible interest rate rises ahead, and continued uncertainty around energy prices.

So how can investors cope when the market moves up and down at speed?  Here are five tips.

1. Remember Daniel Kahneman

Nobel Prize winning laureate Daniel Kahneman is famous for the theory of Loss Aversion. Put simply, this theory suggests that we mourn losses more than we celebrate gains: in fact, we are roughly twice as distressed when we lose money as we are pleased when we gain it.

This is, of course, not a logical position to take, and it can persuade us to sell our investments at just the wrong times. So when the market tumbles and losses seem painful, it is worth reminding yourself that not all of those feelings are logical, and therefore not to act precipitately.

2. Keep your eyes on your goals

Everyone’s financial goals are different, and they should be based on what you want to do with your life, not on the performance of the stock market.

When the markets dip and you feel concerned, checking in with your financial adviser can help as you can ask questions about whether your investments are still on track to meet your goals. The answer may differ depending on how far from retirement you are. Focussing on the long term can help you to ride out the volatility.

3. Invest regularly

The old saying suggests that ‘it’s time in the market, not timing the market that counts’, meaning that keeping money invested is a better way to ensure you make profits, rather than trying to put it in at just the right time.

Setting up a monthly savings plan into your investments can help to smooth your performance, so that you invest whether the market is up or down, and do not have to make your own decisions.

4. Look at history

The stock market has been around for a long time, and volatility has been part of it for just as long. Even looking at the market on a five- or ten-year basis can help you to gain a sense of perspective about what is happening today.

Want to look further? Barclays bank produces an ‘Equity Gilt Study’ every year looking at how different assets have performed over long periods of time. While the full study is available only to clients, this article here gives you some idea.

5. Stay diversified and rebalance when things change

When the stock market experiences volatility, different sectors and geographical areas react in different ways. After a bumpy period, you may find you have ended up with a very different ‘balance’ to your portfolio than the one you had previously.

Diversification is important, and your financial adviser will help you to put together a portfolio that matches your risk appetite and is diversified geographically and through different sectors. However, it is important that you review this regularly.

Ask your financial adviser how often she or he thinks you should rebalance your portfolio (ensuring that it is not tilted towards a particular sector because of changes in value) and whether it is still correctly diversified after particularly volatile periods. Most will rebalance at least once a year.