Investing in stocks and shares (or funds that contain them) will always come with a risk that the value can fall. There are numerous factors that affect the markets and the complex interactions between them mean that even most economists forecast wrongly most of the time.
In 2018, the FTSE 100 (the benchmark of UK ‘blue-chip’ companies) fell by more than 12%. This was the first time that the FTSE 100 had registered such a large annual decline since 2008. Many UK investors have some exposure to the FTSE 100 via their pensions and investments and consequently UK markets falling will have contributed to many people suffering investment losses in 2018. Whilst it can be unnerving to see values fall, a key thing to understand is that losses only become ‘real’ when you cash-out. If you remain invested, the losses only exist ‘on paper’.
History shows that most of the time the best course of action would have been to sit tight and not take any action, other than perhaps to reassure yourself and consider the steps outlined below.
So what steps should you take if you are concerned about the performance of your investments?
Step 1 – Consider what has happened in the context of your long-term plan: Try and ‘zoom out’ and consider the big picture. Volatility is an inherent part of investing and becomes less significant over the long term. Ensure that you are happy investing for the long term and that you have cash reserves that you can draw on to cover ‘emergencies’.
Step 2 – Speak to your financial adviser: If you are concerned you should speak to your adviser. Your adviser will help you to consider the bigger picture. Are your investments still in line with the original goals and objectives that you set for them? Hopefully, your financial adviser will also be able to offer you some reassurance that the performance you have experienced is still in-line with expectations even in negative years.
Step 3 – Consider your ‘attitude to risk’: All investments carry some level of risk (even cash). If the volatility that you have experienced in the last 12 months keeps you awake at night then maybe it’s time to consider a different approach. Again, this would be a good time to check in with your adviser who will help you to understand the options you have and how the various options are likely to impact both your short term and longer term prospects. These days, there are investments available for all risk appetites.
Step 4 – Diversification is key: Investing in a well-diversified portfolio containing shares, bonds, property and cash (both UK and Global) has historically proven to be a highly successful strategy. We believe that all investors should hold a diverse range of assets in order to generate strong long-term returns and minimise risk. Importantly your adviser should rebalance your portfolio on a regular basis to keep it in-line with your intended attitude to risk.
Step 5 Regular Reviews: In today’s on-line world we are constantly tempted to look at our investment values. However, this runs counter to the fundamental belief of investing – that the patient investor will always be rewarded over the long term. Short term, tracking the values can give a skewed view of performance and potentially lead to irrational decisions. Your adviser should be regularly monitoring your investments to ensure they are performing as expected but may well only report to you on an annual basis.
Step 6 Don’t React to Emotions: It is a natural human instinct to take action – ‘fight or flight’. But, before you do, consider Steps 1 – 5. Sleep on it – don’t rush into action and talk to your adviser. Emotional decisions are much more likely to be bad decisions.
Step 7 Automate Investments: Market volatility can represent an opportunity for many. If you are building your wealth (through regular pension or ISA contributions) then volatile markets can be your friend. Buying stocks when markets are low are likely to give the long-term performance of your investments a real boost. By setting up regular savings, you remove the temptation to ‘time the market’.
No one likes it when their investments fall in value. However, it is because of ‘volatility’ that the returns achieved by stocks and shares are attractive in the long term. When markets fall it is tempting to think that immediate action is required but for most investors this is unlikely to be the case.
If you are concerned about your portfolio or would like to consider further investments, we are here to help.