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Smart investors won’t be rushing for the exit

Ed Monk

Ed Monk - Fidelity Personal Investing

The chaos in Westminster - with every possible outcome from the Brexit negotiations still on the table - is adding to an already nervous backdrop to global markets. Trade rows between the US and China, in particular, have driven big stock market movements in the past week.

If anything is certain, it’s that things will remain uncertain for some time to come - whether on trade, Brexit or anything else. Anyone hoping for a quiet time will be hoping for a while yet.

One thing you can be sure of, however, is that seasoned investors will be watching current events with interest. Not to sell, but to buy where they believe a herd mentality has pushed prices on some assets into bargain territory. They know that volatility is the price investors pay for the chance of the higher long-term returns that equity markets have historically delivered over cash, and they stand ready to take advantage of it.

It’s natural to feel uneasy when investments fall in value. We’re programed to be risk averse and to fear losses more than we value gains. Yet, when it comes to investing, that’s a recipe for failure. It is by selling investments after they have lost value that those losses are crystallised. Staying invested can give assets the chance to recover, and it’s noteworthy how often they do just that.

Realistically, most will not have oodles of cash sat on the side-lines to ‘buy the dips’, and even fewer will guess correctly the moment to do it. But remember that basic principles of regular investing, regular rebalancing of your portfolio and diversification are ways to achieve the same desired effect of buying low and selling high.

When prices fall, your fixed regular contribution will buy more assets, meaning there’s a broader base to benefit when the recovery comes. Regular rebalancing - which of course is automatic inside collective investments like funds - means that you’re getting more of what’s cheap, and less of what’s expensive.

Diversification, meanwhile, gives you reassurance that, even when things look bleak in one part of the market, another part will pick up the slack and temper your worst losses.

Many ordinary investors seek out the comfort of dividends as a buffer against market swings, and equity income funds are a popular way to do this. Right now the FTSE 100 is yielding around 4%. That is a decent buffer against short-term falls.

Our Select 50 list of preferred funds offers a good range of equity income funds that have a specific mandate to seek out reliable dividends.

The Fidelity Enhanced Income Fund builds on the underlying dividend offered by its already high-yielding shares by selling the option to buy some of its shares to other investors. The premium it earns by doing this results in a yield of more than 7.1% currently, although this is not guaranteed.

The JOHCM UK Equity Income Fund. This currently offers a yield of more than 4.7%, although also not guaranteed.

It’s not all about the UK - in overseas markets, the Fidelity Global Dividend Fund has holdings in Asia, Europe and the US with a particular focus on reducing downside price risk.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. The Select 50 is not a recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.