Top 5 tips on how to react to rising market volatility
With market volatility rising, Freetrade’s Dan Lane provides his thoughts on how retail investors can manage their investments:
“The lie is that markets hate uncertainty. They thrive off it. It’s individual investors that would rather things were a bit clearer sometimes.
“As much as we would like a bit of certainty, volatility is the price we pay for the hopeful long-term outperformance of equities over cash. As investors, we need it.
“It might seem trite to suggest people continue to save but even if they invest less, it’s the consistency that can really count over the long term. The stock line is that you’ll catch the market highs and lows so your average price will smooth out over the long term.
“That’s true but what you’re really doing is trying to account for the fact we simply don’t know when the tide will change. If you wait until everything is back to normal and the market is riding high, that precious time that could have been spent in the market and those likely lower prices will have gone to waste.
“There’s no denying that won’t be possible for everyone but if you can, do.
“Here are five ways I’ve learnt to cope with the ups and downs of the market”.
Top 5 tips
1. Don’t feed the beast
One of the things we aren’t very good at is making decisions under pressure.
The trouble is that we feel compelled to do exactly that when market volatility strikes. It brings fear, excitement, anxiety and a host of other emotions into the investing process at a time when they just aren’t welcome.
So, remember that volatility is a normal part of investing.
When things get choppy, try not to react rashly. Take a step back and remember this is what we all signed up for.
Helping yourself to understand that now means you are less likely to rush into emotional decisions later.
Holding a range of stocks with different prospects and external influences makes sense at the best of times.
But the market volatility of 2022 shows why it’s useful to diversify between uncorrelated asset types too.
Whether it’s a case of redefining your appetite for risk or having a look at how your portfolio is set up to deal with a shock to stocks, don’t forget about including assets which act differently to each other.
One way to do that is to focus on multi-asset investment trusts with ready made portfolios of uncorrelated cylinders ready to fire at any one time.
A few examples here might be Ruffer and RIT Capital. Both integrate an enormous attention to diversification and make use of assets like private equity funds and options normal investors wouldn’t have access to. They also rotate the portfolio on your behalf so you don’t need to keep on top of those spinning plates across your account.
3. Don’t get too buoyed by a gain, or too distraught at a loss
A good investor will try to stay measured no matter what is happening around the world, or in their portfolio.
If you start punching the air when the screen turns green you’re attaching too much emotion to your stocks.
Being held to ransom by your emotions also means you’re likely to get toppled off that pedestal pretty quickly if the opposite happens.
Thanks to behavioural economics, we know that we are likely to experience the pain of a loss twice as much as the joy of a gain.
Do your research and keep the long-term journey front of mind.
4. Manage risk, plan for opportunity
When the police arrive at the house party, sometimes even the nice kids get nabbed.
In the same vein, when volatility strikes a whole market or sector, sometimes even the good companies are taken down by the crowd.
That’s when it pays to already have your shopping list at the ready, so you can snap up the stocks you like at bargain prices.
A lot of price-conscious professional investors have their wishlist full so they can assess the damage in a downturn quickly and decide if it’s time to invest or walk away.
And that applies to the stocks you currently hold too – is it a chance to buy more of what you like, or sell?
Remember though, keep emotion to a minimum by doing as much of the work beforehand as possible.
5. Keep calm and carry on
Whatever you choose to do, you ultimately have to accept that volatility is going to occur and the odds are you’ll be hurt to one degree or another.
Avoiding this entirely would basically mean holding your money purely in cash (although then you’d be subjecting yourself to inflation rates of 7% that are far in excess of the best savings rates).
Like that annoyingly overused WWII poster, the best response is to keep calm and carry on. Buying at the top and selling at the bottom has never been a wise move to make