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10 things to remember when volatility strikes

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

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The world’s markets look set to end lower for their seventh successive day, as the global coronavirus outbreak spreads and fears grow over the economic impact. All the main indices are down below where they were yesterday.

London shares opened lower and are heading lower still, as a sharp rise in the number of coronavirus cases outside China escalates fears of a global pandemic.

Yesterday we saw the past two days of market falls in the UK and US stock markets erase all the gains that had been made so far this year. With the FTSE 100 now having fallen 13.2% and the Dow Jones 10.7%, comparisons are being drawn with the last big market correction in 2008.

Leading the fallers are the immediately obvious casualties - the airlines, tour operators and luxury goods companies who depend so heavily on Chinese consumer spending.

Luxury car maker Aston Martin was the last to warn on sales in 2020. The spread of coronavirus is set to add to the group’s woes in terms of both supply and demand. China was its fastest-growing market last year; accounting for 9% of sales to dealers.

EasyJet and British Airways-owner IAG are down again today, having already both seen their share prices fall by more than 30% now over the past six days. So too is tour operator TUI.

With airlines cancelling flights and bookings down, there can be no doubt that profits will be adversely affected at the likes of EasyJet, BA and TUI. Just how much is the big question and one that no one can answer until we know the full impact and the duration of the outbreak.

Drinks giant Diageo has issued a coronavirus-related profit warning as drinkers stay away from bars and reduced airport traffic means airport retail areas see a fall in sales. On the plus-side, household goods group Reckitt Benckiser says demand for its Dettol-branded hand sanitiser gels is outstripping supply in China.

With stock markets suffering their worst week since the global financial crisis, Bank of England governor Mark Carney has told Sky News that the outbreak could lead to a downgrade of the UK’s economic growth prospects. Meanwhile Goldman Sachs has said that the coronavirus will wipe out US corporate profit growth in 2020 and may trigger recession.

Markets don’t like uncertainty, because people don’t like uncertainty. But for now that’s what we have to contend with.

The most obvious response to this kind of situation is fear, which is hardwired into human behaviour and developed as a way to respond quickly to danger. However, it’s not particularly good at keeping investments out of harm’s way; especially when investors focus on the most recent news to make decisions, rather than looking at historical examples and taking a longer-term view.

Of course, it is important to look at your investments at times like these and make sure your investments reflect both your goals and the core principles of good investing.

An obvious one is staying well-diversified; in the current context that could mean adding exposure to some assets that can benefit from a flight to safety as the virus spreads and others that are positioned for any snap-back once conditions return to normal. It is especially important to avoid trying to time the market, which has been shown to hurt long-term returns across a range of asset classes

As we have seen, markets can react sharply to potential threats, but they can also quickly stabilise and then eventually recover. Therefore, it is important not to focus too much on short-term swings, however powerful they may seem, and instead invest in quality companies that can continue to deliver sustainable returns over the long term.

10 things to remember when volatility strikes:

  1. Volatility is a normal part of long-term investing
  2. Long-term investors are usually rewarded for taking equity risk
  3. Market corrections can create attractive opportunities
  4. Avoid stopping and starting investments
  5. The benefits of regular investing tend to stack up
  6. Diversification of investments helps to smooth returns
  7. A focus on income increases total returns
  8. Investing in quality stocks delivers in the long run
  9. Don’t be swayed by sweeping sentiment
  10. Active investment can offer benefits in periods of increased volatility.

Fidelity’s Select 50 Balanced Fund is a good starting point. It is designed to ensure you stay invested in a controlled and mindful way, with the fund’s manager Ayesha Akbar putting her past experience of managing volatility to work, to produce a balanced portfolio designed to navigate through the ups and downs of the market.

More on opportunity in uncertain times

Five year performance

(%) As at 27 Feb 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Dow Jones 4.1 41.8 11.3 8.2 4.4
FTSE 100 -8.8 24.0 4.3 1.7 0.3
IAG -5.6 0.6 18.5 2.7 -3.2
EasyJet -10.5 -33.7 79.4 -19.9 -7.8

Past performance is not a reliable indicator of future returns

Source: Refinitiv, as at 27.2.20, total returns in local currency

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

What you could do next

Be prepared

Market volatility can feel like an investor's worst nightmare. But if you take a few simple steps to prepare, you can keep a calm head when it arrives.

Aim to spread risk

The Fidelity Select 50 Balanced Fund aims to produce long-term capital growth from a globally-diversified range of assets.

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