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.
What a difference a few days can make. Earlier this week I wrote about US stocks recovering all their losses for the year, just in time for renewed coronavirus concerns to prompt a remarkable volte-face in share prices.
Central bank stimulus and optimism over the pace of an economic rebound have fuelled market performance since March, with hopes countries will be able to avoid a spike in coronavirus cases as they reopen their economies.
But fears that this might be harder to achieve hit market confidence, reminding us there is still a long way to go to tackle the virus and the subsequent economic repercussions.
The path back to normality might take longer than first thought and is likely to contain bumps along the way. Investors should be ready for further uncertainty and perhaps less outright optimism from markets than we have seen until now, as the headlines improve and worsen.
But there are some important principles for us to keep in mind as we prepare ourselves for virus volatility. Here are a few things to remember as we navigate whatever comes our way.
Recognise your own behaviour
Behavioural economics tells us that in times of uncertainty or pressure, we revert to our primal instincts. We think quickly, we act rashly and we take risk off the table. As investors, the more beneficial way to approach periods like these is to think methodically, act sensibly and manage risk with a level head. Easier said than done.
In reality this means considering the long term, not just the market graphs in front of us now; it means placing our current actions in the context of our entire investment journeys; and it means recognising that risk is an inherent and important part of investing.
Don’t just do something, sit there
If you invest on a regular basis, the ups and downs in the market can be to your advantage. When markets fall you automatically benefit by getting more shares or units for your money. This is known as ‘cost averaging’ because it can considerably lower the average price you pay for your investments. And, if you buy when prices are low, you reap all the rewards when they rise again.
If you are prone to quick reactions, think about taking yourself out of the equation altogether. Regular savings plans dripping your money into the market mean you don’t have to risk making an emotional decision right now. You could thank yourself for it later down the line.
If you sell - when will you buy again?
Taking risk off the table means selling and moving into cash for most of us. But ask yourself, what will you do with that money?
There will always be market news to sway us, so those hoping to sell down investments now will almost certainly have to buy back in at a time when the outlook is still unclear. Taking yourself out of the market also prevents your money from taking part in the eventual recovery.
That’s the hard bit about trying to time markets. You don’t just need to get one call right, you need to get two. Selling out is the easy bit because you can do it and swim with the crowd at the same time. Buying back in, on the other hand, requires a contrarian approach that few, when it comes to it, are comfortable adopting.
Diversify, diversify, diversify
Equities have borne the brunt of the latest bout of volatility but are there other assets in your portfolio on hand to pick up the slack when shares lag?
Having a mix of assets from shares and funds to bonds and cash, across different sectors and geographies allows at least some cylinders to fire at any one time and is the best way to ensure that one spell of volatility doesn’t take your entire portfolio down with it. Spreading your assets means sharing the risks and is an essential for any investor.
Find out more about how to manage your money in uncertain times in our Coronavirus and volatility section.
Important information: 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. 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.