Focusing on long-term horizons
Fear and worry are understandable, particularly as the coronavirus (COVID-19) outbreak led to the biggest daily drop in the FTSE 100 since the financial crisis. Trying to second-guess the impact of events such as the coronavirus or the recent stock market volatility – or even attempting to make a bet on them – rarely pays off. Instead, investors who focus on long-term horizons – at least five to ten years – have historically fared much better.
Sensible diversification – owning a mix of assets, including shares, bonds and alternative investments such as property – can help protect investors over the long term. When one area of a portfolio underperforms, another part should provide important protection.
Risk tolerance and time horizon
If you have a well-diversified portfolio, then it’s more important than ever to stay the course. You have a strategy in place that reflects your risk tolerance and time horizon, so remain committed. This will help you navigate through periods of uncertainty when some investors are panicking or acting out of fear. Volatility is not all bad, as long as you are prepared to take advantage of the unique opportunities it brings.
Be aware of the psychological effect this type of volatility has on you as an investor, and resist the urge to be reactive. When you turn on the radio or television, or log onto Twitter or Facebook, you might assume volatility is a terrible thing, requiring all investors to react and make changes to their portfolio immediately.
Proper diversification and perseverance
It’s important to understand that this movement is not all bad for investors. Some commentators may talk about volatility as a detriment to markets and investors, but fail to discuss the opportunities that arise for investors during periods of market volatility.
No one knows how severe any market turbulence will be or what the market will do next. It could be over quickly or become more protracted. However, no matter what lies ahead, proper diversification and perseverance over the long term are very important.
Ups and downs of different types of market conditions
It’s likely that the coronavirus will continue to have an impact on markets over the coming months and even years. However, major events causing markets to fall, particularly in the short term, is something we’ve seen time and time again. And it doesn’t mean that markets won’t recover, so try not to worry too much.
History shows again and again that the ups and downs of different types of market conditions are part and parcel of investing, and there have been many times in the past when events have caused short-term corrections.
Experience of dealing with different types of market
Stock markets around the world have recently experienced some very turbulent activity, so as the virus spreads around the world, investors need to be able to cope with some pain. The key to remember when stock markets fall is to remain calm. Don’t panic. Don’t frantically sell. If you can avoid it, don’t even log into your investment account.
At moments like this, the skills and experience of financial advisers come into their own. Not only do advisers have the experience of dealing with different types of market conditions, but they can also help to take the emotion out of your decisions.