How much market volatility is normal? As an investor, it’s natural to feel a sense of worry when you see the value of your portfolio falling, but is it all part of the life of an investor?
Stock market ups and downs are par for the course when it comes to investing. If we take this year as an example: we’ve seen relatively low levels of market volatility over the first seven months of the year, but within that time period there have been days of big falls and rises. It’s these days, where there are either big gains or big losses, that you tend to hear about in the press. So, what can you do as an investor?
Commit to the long-term and resist the urge to tinker
Investing is a marathon, not a sprint. The key to successful investing is adopting a long-term view, aligned to an acceptable level of volatility and end goals. Short-term losses can prick at emotions – no one likes to see their portfolio go down in value – but staying in the market and resisting the temptation to tinker can pay off. Remember that greater risk usually equals greater returns. Generally speaking, if you alter your strategy in response to a dip in markets, you’ll suffer from adverse performance because you’ll not have adequate exposure when markets rebound. Timing such a rebound is incredibly hard to get right.
Those who put all their eggs in one basket are playing a high-risk game, particularly so when high volatility means assets are spiking and dropping at abnormal rates. A diverse portfolio is one that contains a mix of different asset classes, for example bonds, stocks and even cash. And these different assets should be represented with exposure to a wide variety of industries, countries, sizes of companies and so on. The diverse investments mean that when one asset falls in value, investors are less likely to suffer big losses.
Seek out low fees
Every investor should make sure their hard-earned returns aren’t eroded by high fees. Sneaky hidden charges and commissions can scupper long-term financial performance and due to the compounding effect make a huge difference in the long-term. It’s important to know exactly what you’re likely to be paying for the full duration of your investment before you buy. Remember to ask your provider about up-front charges, commission, management fees and charges for underlying investments.
Stay tax efficient
Make sure you’re take advantage of the tax-efficient allowances. This year you can invest up to £20,000 in an ISA and any investment returns you enjoy will be free of capital gains tax. You may also be able to benefit from tax breaks by investing in a pension. If you have losses from investments that have been sold, these can be carried forward to offset gains. And don’t forget additional incentives, for example on SEIS and EIS investments.
Ignore the noise
There is a constant stream of commentary and speculation on the daily fluctuations in financial markets. This can be distracting and give cause to emotional responses that push investors to act irrationally and not in the best interests of long-term investment goals. It is essential to stay focused on why you are investing and remember you are in it for the long-term. If you made a careful decision to invest three weeks ago on a twenty-year basis there is no need to change your mind because of what has happened in the short time since.
Risk warning: 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. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek independent financial advice.