Achieving your financial goals through investing, and one size does not fit all
Even as we hope to put the coronavirus (COVID-19) pandemic in the rearview mirror in 2021, uncertainty regarding both the virus and Brexit is likely to continue to weigh further on the UK and global economies as well as on our personal finances during this year.
2020 was a tumultuous year. Government support during the crisis has been significant in its scale, borrowing more since the lockdown was imposed back in March 2020 than during the entire year following the Global Financial Crisis.
But even with unprecedented steps being taken to ensure the roll-out of vaccines globally, the big question for 2021 is ‘what further market volatility can we expect?’ Market volatility can impact on your investments considerably, depending on the specifics of your portfolio. While we hope volatility is less elevated this year, financial markets and the economy could still remain at the mercy of COVID-19 developments.
Strategies to help you manage volatility
Volatility is essentially a measurement of risk, and as the balance of risk and return is at the heart of investing it is important to understand how it affects your investments, but it’s also important not to let emotions drive your decision-making.
Setting specific investment goals is key
It can be difficult to focus on the big picture during any times of market turbulence. Understandably investment volatility can make it easy to focus on the short term and those temporary peaks and troughs. Setting your specific investment goals is important to keep you focused when you need it and will enable you to build a portfolio to get you where you want to be. Investment strategies should include a combination of various investment and fund types in order to obtain a balanced approach to risk and return.
Maintaining a balanced approach is usually key to the chances of achieving your investment goals, while bearing in mind that at some point you will want access to your money. This makes it important to allow for flexibility in your planning. Your long-term plans (those that are at least five years away) should be the focus of your investment portfolio.
Market factors that determine volatility
Market volatility can be nerve-racking, even for the most seasoned investors. Many different factors can impact market volatility, sending values of investments in either direction. Some of the most common factors that determine the volatility of the market include investor concern, political events, natural disasters and major events in foreign markets. But it’s important to keep matters in perspective. Avoid making rash decisions and focus on your long-term goals.
Bear markets are unsettling but they are not new and history proves they don’t last forever. Stop looking at your portfolio and its value on your phone, tablet, laptop or desktop. It’ll only make you anxious – or worse, make you want to do something. Keep investing as you normally would. Also don’t attempt to pick the market bottom or the turnaround to jump in. Fight the impulse to think you can.
Riding out the market ups and downs
Investments don’t always go in a straight line – they have the potential to react and recover from short-term market events. When markets become volatile, the gut reaction for most of us is to panic – to buy when everyone else is buying (and when prices are high) – and panic sell on the downside (when prices are depressed). Panic selling also runs the risk of missing the market’s best-performing days.
Rather than looking at short-term volatility, it pays to look at the bigger picture. Over the long term, investments will usually deliver returns that allow you to grow your wealth. Looking at a twelve-month snapshot of your investment portfolio may show that investments have underperformed but look back over the last five or ten years, and you’ll hopefully be on track.
Carefully considered decision to invest
By making a carefully considered decision to invest, you’re giving your money more opportunity to grow than if you’re just saving it. How much risk you take will affect how your money will grow so it’s important to understand how much you’re willing and able to take. All investments come with a level of risk and don’t always perform as expected. This is why you need to make sure you’re making the choice that’s right for you.
One of the first steps in developing an investment strategy is to identify your tolerance for risk as an investor, referred to as your ‘risk profile’. Every investor has a different risk tolerance with regard to their investment selections. Making investment decisions can depend on your personality as well as the goals you are investing towards. Weighing up the level of risk you’re willing to be exposed to can be challenging. Whether you’re reviewing your pension or building a personal investment portfolio, balancing risk is a crucial part of the process.
Well-allocated investment portfolio asset classes
During volatile times, asset classes such as stocks tend to fluctuate more, while lower-risk assets such as bonds or cash tend to be more stable. By allocating your investments among these different asset classes, you can help smooth out the short-term ups and downs. Portfolio diversification may reduce the amount of volatility you experience by simultaneously spreading market risk across many different asset classes.
By investing in several asset classes, you may improve your chances of participating in market gains and lessen the impact of poor‐performing asset categories on your overall portfolio returns. A well-allocated portfolio alleviates the need to constantly adjust investment positions to chase market trends, and can help reduce the urge to buy or sell in response to the market’s short-term ups and downs.
Diversification to protect and grow investments
Diversify, diversify, diversify – in other words, ’don’t put all your eggs in one basket’ – is sage investing advice. In addition to diversifying your portfolio by asset class, you should also diversify by sector, size (market cap) and style (e.g. growth versus value). Why? Because different sectors, sizes and styles take turns outperforming one another.
By diversifying your holdings according to these parameters, you can smooth out short-term performance fluctuations and mitigate the impact of shifting economic conditions on your portfolio. Diversification is essential to any successful investment strategy and provides an opportunity for both protection and growth within your investments.
Time to reach your financial goals?
There’s always a purpose behind financial investments. What’s yours? For many of us, building a nest egg feels like a natural thing to do. Perhaps it’s performance. Or preserving your wealth for the next generation. Or maybe you want your investments to reflect your values. What’s important is that you understand your situation and your financial goals. To discuss accessible ways of investing that could help you make your money work harder, please contact us.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.