Investors’ nerves have been tested once again in recent weeks amid warnings about potential stock market falls. And while ups and downs are part and parcel of investing, it’s a reminder that portfolios should be robust enough to withstand any coming headwinds.
Indices including the UK’s FTSE 100 have hit record highs this year, even against the backdrop of conflict in the Middle East, global economic uncertainty and the effects of US trade tariffs. The latest concerns include speculation of an artificial intelligence (AI) ‘bubble’, with AI-related stocks attracting huge valuations that some consider disproportionate. There was also a banking sell-off in mid-October, with bank stocks falling sharply but briefly on the news of regional US banks reporting heavy fraud losses.
So while stock markets remain close to record highs, there’s some key points to remember if markets do become more turbulent.
Keep your head when all about you are losing theirs
Rudyard Kipling’s advice has rarely been more pertinent for investors. In times like these, with so much noise about the outlook for global markets, it’s easy to feel a sense of panic and dread. We wouldn’t be human if such events didn’t have that effect – but that doesn’t mean we should act on those feelings.
Giving in to emotions such as fear, anxiety and greed can cause more problems for your investment portfolio than any stock market falls. Knee-jerk reactions include selling investments in a panic when markets fall, even when you have a long-term investment horizon. Head here to find out more about the behavioural biases that can get in the way of successful investing.
Diversify, diversify, diversify
It’s so important that it bears repeating. By spreading your money across a range of different investments, you can reduce your risk and increase your chances of long-term growth. A properly diversified portfolio will invest in a range of different companies, sectors, regions and assets. A properly diversified portfolio is designed not just for the crisis you expect, but also for the one you don’t see coming.
If you’re already well diversified you’ll have a buffer against sharp falls in one or two sectors or regions. If you’re not, read this to find out how you can maintain a robust portfolio able to withstand periods of volatility. You can strengthen your portfolio further by ensuring you’re using the best platform for you. Check out more on how to get the best from your investment platform, and use our free comparison tool to find the best one for your needs.
Patience is usually rewarded
Even though investing during times of turmoil can be uncomfortable, the golden rule is that the stock market rewards patient investors. Anyone investing over the long term – anything from five years to several decades – will experience ups and downs along the way. And while some of the falls can seem scary, that’s when you need to stick at it. For example, investors who withdrew their money in a panic when the financial crisis erupted in 2008 didn’t only crystallise their losses – they also missed the biggest gains in a decade when stock markets rebounded by 84%.
If you stay invested you’ll get maximum benefit from the magic of compounding. This is when you invest the gains made on your investments back into your portfolio rather than taking profits. This means the gains themselves will then grow – that’s why it’s often referred to as a snowball effect.
Review your portfolio
The need to ensure you’re properly diversified means taking a look at your portfolio. Even if there’s no need to make changes (which will likely incur trading charges), reviewing your portfolio fairly regularly will help give you peace of mind during a period of turmoil. Check that your investments are sufficiently spread across a range of different assets, regions and industries, and consider whether your portfolio still reflects the level of risk you’re comfortable with taking. Read about the six things to look for when reviewing your investments to help you get started.
But resist the temptation to pick the winners
Do you remember which stocks investors were diving into when the Covid-19 pandemic unfolded? The money was flowing into the companies seen as benefiting from people having to stay at home, such as Peloton, Zoom, Netflix and ASOS. Meanwhile, the money flowed out of companies perceived as being at the biggest disadvantage, such as those in the leisure, travel and hospitality sectors.
But while the likes of Zoom and Peloton saw their share prices rise sharply, it didn’t last. Conversely, some hospitality and travel companies have bounded back strongly, reflecting a post-pandemic appetite for travel and experiences. In other words, if you’re going to dive into short-term opportunities you’ll need to know when to do so and when to sell out – and unless you know what the future holds, that’s almost impossible.
Photo by Sajad Nori on Unsplash
