It’s been a bumpy start for financial markets this year. Geo-political tensions in the Middle East caused oil prices to rise, as investors feared the impact this would have on the availability of this crucial commodity.
Gold rose too, reaching a seven year high earlier in the week as investors warmed to the precious metal’s safe haven status.
Equities bounced around on the ebb and flow of headlines.
Now that the tensions appear to be easing and investors are focusing on the positive prospects of a US-China “phase one” trade deal next week, markets are ending the week in a much more buoyant mood.
In fact, yesterday Wall Street’s main indices hit record highs in a relief rally. It’s a timely reminder that when markets fall they can also bounce back quickly. As investors it’s important to always try and keep a long-term view and avoid knee-jerk reactions when volatility strikes.
Of course, markets never go up in a straight line, so we should expect further volatility in the future, whatever the direction of events in the Middle East, or closer to home as markets respond to the UK’s negotiations over leaving the European Union.
Here are three important investment principles that have stood the test of time and should always be remembered when the outlook is uncertain.
1 - Be diversified
Being diversified, or not “putting all your eggs in one basket”, is crucial for all investors. Taking too much risk and investing in one asset you really believe in can have dire consequences if you get it wrong. Similarly, not taking enough risk and investing in a very cautious way could mean over time your investments have not grown enough to beat the negative effects of inflation.
With stock market investing there are no guarantees and even the experts get it wrong, so spreading your investments over a range of different assets, like shares, bonds and property, over a number of different regions and sectors, is the best way to be diversified. That way, the investments doing well will compensate for the ones doing not so well. The easiest way to get this diversification is through a fund. For fund ideas, a good place to start is Fidelity’s Select 50 list of recommended funds or the Fidelity Select 50 Balanced Fund which, as its name suggests, provides a balance of different investments in the one fund.
2 - Don’t try and time the market
When it comes to investing, it is time in the market that’s important, rather than trying to time the market. When the stock markets get volatile it’s easy to think you can sell to prevent further losses and buy back before the markets go up again. However, in practice, this is extremely difficult. No one rings a bell at the top or the bottom of the market. Trying to time the market means you have to time two decisions perfectly - when to sell and when to re-buy again.
Just as market falls come unexpectedly, so do the sudden rises. It, therefore, makes sense just to stay invested to ride out the volatility. The most important lesson with investing is to make sure you can give that investment time to grow. If you know you’ll need the money in the short-term and can’t invest it for 3-5 years, it would be foolish to take on too much risk. It could fall in value just before you need it.
Staying invested also helps you benefit from the power of compounding, which is best described as earning interest on interest. Over time it’s amazing how this adds up.
3 - Invest regularly
Making regular monthly contributions to your investments as part of a savings plan can help them grow into a sizable sum over the long-term, even if you’re only investing a small amount.
Setting up a direct debit also removes the temptation to try and time the market as your investment is made automatically for you on the same day each month. This means that over time, if the stock market is rising and falling, you’ve paid more of an average price over that period, smoothing out the investment journey.
What is the outlook for investors?
Finally, it also pays to have an understanding of the outlook for stockmarkets and the current themes investors should be aware of. This allows you to tilt your investments towards the most attractive areas and ease back in the more expensive ones. Each quarter, Fidelity Personal Investing’s Tom Stevenson writes an Investment Outlook report which is available to download. He also discusses the outlook in a live webcast which includes a Q&A session with viewers. If you missed the live broadcast, you can watch it below. Tom also explores the topics in more detail in this week’s MoneyTalk Podcast.
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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. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. 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.
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