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.
Why it pays to look through volatility.
Investors could be forgiven for thinking that this is not a good time to be investing in the stock market. Wherever you look, the economic and medical headlines are alarming and yet markets have risen sharply from their recent lows, fuelled by massive stimulus from governments and central banks. In some cases, they have regained their pre-pandemic highs. This mismatch between markets and the real world looks hard to justify.
The reality of investing, however, is that the right moment to take the plunge never looks that way at the time. If everyone around you is relaxed about the outlook, chances are a storm is just over the horizon. A good time to invest is sometimes when things look uncertain because that is when the price of an investment can be most attractive.
Here are six reasons to look beyond the short-term noise and consider putting your money to work in the markets. Even though it might feel extremely uncomfortable to do so.
1. The outlook for markets is always unclear. It is only with the benefit of hindsight that things look obvious. At any point in time, the future is always unknowable. Viewed from the present day, earlier periods of great uncertainty, like the 1970s, look more orderly. We know that inflation was subsequently tamed. That the unions did not undermine the system. That wars raging at the time eventually ended and recovery began. In 10 years' time we will know how Brexit worked out, how the US/China trade wars resolved themselves, the scale of the recession that the coronavirus outbreak and the measures taken to contain it caused. But if we step back from the market today for fear of what might happen, we will not be able to wind the clock back if things turn out better than we expect.
2. The consequence of great uncertainty is that many investors are nervous and are holding back from investing in anything other than the safest and most predictable situations. This means that the prices of some shares and other investments are cheaper than they would otherwise have been. The divergence between the performance and valuation of the technology-heavy US stock market and those in the UK and emerging markets, for example, is wide today.
3. When you are in the eye of the storm, it is hard to believe that others are not also being buffeted by strong winds. The epicentre of the coronavirus pandemic has shifted from Asia to Europe and now to the US and Latin America. This means that investors in China and other markets in the Far East are starting to look beyond the crisis to the recovery beyond. A well-diversified portfolio protects an investor from problems in one part of the world and ensures that you have some exposure to the other parts that are doing better.
4. We like to say that time in the market is more important than timing the market. This is partly because the market cycle is different from the economic and even the news cycle. Investors tend to anticipate the future, so they are less concerned by what is happening now than by what might happen in the future. It is hard to predict either the direction or the timing of market changes and, even in a falling market, there can be some strong days when markets move in the opposite direction. Timing the market is also extremely risky because missing even a handful of the best days in the market can seriously reduce your long-term investment returns. Because the best days often follow quickly behind the worst days, it is too easy to be out of the market when these big rallies take place.
5. Another reason to keep investing through difficult times is the fact that it is extremely unusual for every type of investment to perform badly at the same time. When shares fall, bonds often rise and vice versa. Or another asset class like property or commodities picks up the baton. Because of this, the best defence against volatile markets is diversification. A well-balanced portfolio - spread across different assets and across different geographical regions - can be expected to provide a smoother ride.
6. Finally, volatile markets can be an investor's friend as they are more likely to deliver attractive opportunities as investors throw the baby out with the bathwater. When markets are panicky, good shares are sold just as eagerly as bad ones. That can create plenty of chances to buy attractive assets at good prices. Volatile market conditions can be a good environment for stock-pickers who try to find winners and avoid losers.
For half a dozen reasons, therefore, a high degree of uncertainty should not be seen as a reason to run for the safety of safe havens like cash. Sometimes an investor has to simply keep calm and carry on.
Important information - tax treatment depends on individual circumstances and all tax rules may change in the future. Investors should note that the views expressed may no longer be current and may have already been acted upon. 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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