Best policy – stay invested even in periods of market volatility
Investment markets go through periods of fear and unpredictability. Poor economic news, a political crisis or unforeseen event can result in unexpected market downward volatility that can be extremely frightening and unsettling for investors. Here Matthew Bromley, director and chartered financial planner at Cowgills Wealth, looks at how history has shown us that it’s much better to sit tight and ride the wave.
These periods in investment markets can result in some investors changing their long-term plan by selling their assets. However, avoiding an emotional response at this time is crucial to longer term success. Obviously, this is easy to say, and when the rest of the market is seemingly selling it is hard not to be caught up in the panic. Remembering your investment goals and objectives and time horizons are of vital importance and will undoubtedly help you to avoid making short term emotional decisions.
History would suggest that investment market volatility tends to be short lived. Most experts favour that investors are better off longer term sitting tight through these periods of uncertainty,
Investors who try and sell at the top of a market and buy back in at the bottom valuation are looking to “time the market”. There is clearly logic to this strategy, but it is extremely dangerous during volatile markets. This would be the time to resist making changes to your long-term investment strategy. Remembering your initial investment aims and goals and time horizons will offer you the best chance of participating in an investment market recovery. As the saying goes, it is time in the market not timing the market.
As recent weeks, and history, have shown us, falls in investment markets tend to be confirmed to a short period of time. Once a fall has occurred, the biggest gains and recovery are often clustered together in a similar swift pattern. An investor who has looked to time the market could easily miss the rally whilst they are out of the race.
To help illustrate this, we have analysed the average annual return from the UK stock market over the last 15 years. The chart shows, missing just the ten best days over this period would have reduced your annual return substantially. Timing the stock market is extremely difficult, but the best policy is usually to stay fully invested over the long term.
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The value of investments can fall as well as rise. You may not get back what you invest.