The FTSE100 reached a new all-time high of 7778.64 on 12 January this year. In the three months since then, we have seen the index drop at one point by almost 9% to just below 7000, although it has recovered a bit since then, closing last night up a tad at 7328.92.
This drop would be classed as a correction rather than a crash but it is an indication that volatility may be back on the agenda. So as an investor what does it mean and what can you do about it?
The first thing not to panic and to remain calm and rational. Many people make the mistake of making investment decisions based on short-term performance or sentiment. Because of this, they end up buying at the top of the market and then selling at the bottom when sentiment turns negative.
As an Investor, you will get better long-term returns and come through the difficult times by staying calm, adopting a long-term strategy and then sticking with it, ignoring all the short-term noise.
Just remember, if your investment strategy was right for you before this spate of market volatility, then it’s probably not too far off being right for you now.
If you haven’t already done so, the second thing to do is to spread your risk. Diversification always makes sense in a balanced portfolio and can help it withstand any major market shocks. You should therefore look have a portfolio spread across different assets such as shares, fixed interest, commercial property and cash. In this way, you can benefit from long-term stock market growth whilst having some protection for your portfolio. Amongst your equities and equity funds, it can also make sense to have some value stocks as well as growth stocks.
Bear in mind, however, that the right mix of assets for you should be driven by your own personal circumstances, financial objectives and attitude to risk.
Thirdly, you should look to maintain a cash buffer. This provides you with a degree of flexibility. When shares are falling, you are then safe in the knowledge that part of your money is not losing value. Also, it means that you can look to pick up some investment opportunities with shares at lower prices.
Which leads nicely on to the fourth point. Many brave investors may see the recent stock market falls as an opportunity to buy. Despite the current volatility and uncertainty, many companies continue to perform consistently well, so it will now be possible to buy some of these companies at a reduced price.
However, don’t buy just because the price looks cheap. You need to keep in mind how any new purchases will fit in your portfolio, looking to ensure that you don’t take on too much risk. The key is to maintain the discipline of valuation and to look for stocks that start to seem very cheap as the market falls.
Fifthly, consider making monthly investments, rather than investing occasional lump sums. In this way, you benefit from pound-cost averaging – buying more shares or units when the prices are low and fewer when they are high. This approach reduces the risk of market timing and means that if investments fall in value, then units are simply bought cheaper next time, bringing down your average purchase cost.
Finally, you should look to rebalance your portfolio on a regular basis. This is particularly important during periods of market volatility, as the shape and risk profile of your portfolio can easily change significantly in a relatively short space of time.
As stated above, if you already have a well-balanced and well diversified portfolio, you may need to do very little except maybe some rebalancing. You should then seek to remain calm, ignore all the market noise and simply wait for the markets to recover.
However if some of the above resonates, then contact us to discuss your investment portfolio and plans going forward.
This article has been published for information purposes only and should not be considered investment advice or an offer of any product for sale.