One of the few certainties in investing is that you will encounter market downturns. There’s no hard and fast investment rulebook, but here are a few basics to help you deal with them.
Warren Buffett, the world’s most successful investor, has a wealth of experience and advice for investors. One of his more contrarian gems is to be: “fearful when others are greedy and greedy when others are fearful”. In turbulent times, when assets are down, the most successful investors do not panic; instead they stay calm and follow the investment rulebook to outwit the markets by staying focused on a long term strategy. 1
Hold a diverse portfolio
The best way to maximise your chances of getting through a rough time unscathed is to hold a wide range of different types of assets. Buy shares from around the world, invest in government bonds and educate yourself about investment alternatives. Diversification is one of Nutmeg’s investing principles and to help you ride out market volatility we build every portfolio to be as varied and robust as possible.
Trust very few fund managers
Funds managed by people can be expensive, and aren’t always the best option. Always be sure to shop around, and look at all your options including online fully diversified managed portfolios. There is often a great deal of hype surrounding the new fund manager on the block – don’t be fooled. In uncertain times, it is tempting to latch onto advice that sounds authoritative and seems to offer a safe pair of hands. In reality, the majority will fail to deliver on their promises.
Love tracker funds
Low-cost index-tracker investments such as Exchange-traded Funds (ETFs) are a cheap way to introduce diversity into your portfolio and many deliver consistent and reliable returns. Look out for ‘smart’ tracker funds which stack the odds in your favour. These types of funds have been shown to perform better than traditional ‘passive’ trackers but work best as an addition to an established portfolio rather than a core investment. 2
Keep costs low
If you’re shelling out for high fees on your funds, your outgoings will eat into your profit margins and make your investing endeavours far less lucrative. There are expensive financial advisers, overpriced funds and sneaky hidden fees out there, so be careful. Financial consultancy The Lang Cat recently published an independent report into the true costs of investing – take a look to find out about the cheapest ways to invest between £500 and £1 million.
If and when the markets fall, the most important thing to avoid is panic selling. Keep calm, breathe, and hold onto your assets – resist the urge to offload the losers. During bad downturns, such as a bear market when assets are down more than 20% against their peak, scaremongering and sensationalist headlines tend to be rife. Try to block it out – short term noise only serves to distract you from your long term investment goals. Remember, every downturn is eventually followed by an upward swing. 3
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.
1. Time to panic? No, follow the investment rulebook, The Telegraph 7th August 2016
2. ‘Smart tracker’ funds try to stack investing odds in your favour – and at a low cost: Should you buy an index clone with a mind of its own? Thisismoney.co.uk 15th November 2017
3. Five things investors should not do in a bear market The Financial Post 22nd January 2016