Investing your money can be a great way to grow your wealth over time, but it’s important to stay invested for the long haul. While market volatility and economic uncertainties can be unsettling, history shows that those who stay the course tend to come out ahead.
It’s been a bumpy ride for investors over the past year, with soaring inflation, sky-high interest rates and the Russian invasion of Ukraine all helping to drive market volatility. Global stock markets have experienced one of the most volatile periods for some time.
Inflation surged as economies emerged from pandemic lockdowns and Russia triggered an energy crisis in Europe by choking supplies of cheap natural gas. In response, central banks have scaled back stimulus measures and raised interest rates to help reduce demand and bring prices under control.
This shift has unsettled markets. Global financial conditions have tightened as central banks have hiked interest rates and the pace of growth is slowing as a result. More recently, stronger than expected economic readings and persistent inflation have fuelled fears that central banks could keep interest rates higher for longer.
Take a long-term approach
When there’s a sudden swing in markets it’s important not to react by making irrational investment decisions. Fear and panic may cause investors to make impulsive decisions that could result in significant financial losses.
Investors can also be influenced by cognitive biases, causing them to make decisions that could harm their portfolios. One example is loss aversion, where the fear of losing outweighs the potential for gains. This can lead to uncertainty about when to invest, which stocks to choose, and whether to hold onto underperforming investments in the hopes of a recovery.
If you react to the uncertainty, you are more likely to make costly mistakes, like buying when prices are high or selling when they are low. Staying calm during times of market turbulence can help you make better-informed decisions.
While market turbulence can be uncomfortable, you should ignore the market noise. You can minimise the risk of making costly mistakes by staying focused on achieving your long-term investment objectives.
Time in the market
Attempting to time the market by buying low and selling high might seem like a successful investment strategy, but it’s a notoriously difficult one to do successfully. Markets can be volatile, so it can be difficult to predict their normal ups and downs.
The problem with trying to time the market is that it can lead to missed opportunities and significant losses. Investors who sit on the side-lines waiting for the perfect time to invest risk missing out on the biggest days. For example, if an investor had sold their investments during the 2008 financial crisis, they would have missed out on the subsequent recovery and the significant gains that followed.
Missing just a handful of the best days in the market can drastically reduce an investor’s average returns over time.
History shows us that time in the market – rather than timing the market – is the most reliable and effective investment strategy for achieving long-term financial goals.
For example, if you invested £10,000 at the start of 2002, it would have been worth £32,432 after 20 years*. However, if you missed the best 10 days, it would be worth £16,782, and if you missed the best 60 days, it would have fallen to £2,888.
Even experts find it challenging to predict market declines and rebounds. Attempting to time the market can lead to substantial losses and jeopardise the value of a portfolio, which is why it’s generally recommended to remain invested, even during periods of market turbulence.
The worst days of the stock market are frequently followed by the best days, especially in periods of volatility. So if you sell when the market falls, there is a strong chance you will miss out when it recovers.
Bear in mind the value of investments can go down as well as up. You could get back less than you invest.
Markets usually recover
Volatility in markets is normal, so it’s important to keep in mind your long-term investing plans rather than changing your strategy based on short-term movements. While we can’t predict the future, history shows us that markets usually recover after a major decline**. It can take time, in some cases even years, so it’s important to remain invested when the going gets tough.
For example, the global economy experienced a major shock in 2008, triggered by a severe downturn in the US housing market and a subsequent wave of defaults on subprime mortgages. The resulting turmoil in financial markets led to widespread panic among investors and many businesses and financial institutions faced significant losses.
As a result, the stock market suffered a steep decline, with many major indexes such as the FTSE 100 and the MSCI World experiencing their worst annual performances in decades. In response, governments and central banks around the world implemented a range of measures to mitigate the damage, including fiscal stimulus packages and interest rate cuts.
Markets recovered eventually, although it took several years. Many businesses and individuals continued to feel the impact of the downturn for some time.
Market volatility
Investors may become anxious when they witness their portfolio value fall in value during a market downturn. Nevertheless, it’s important to note that these downturns usually last for only a short period.
For instance, the Covid-19 pandemic triggered one of the most significant market crashes in March 2020, but the market bounced back quickly, reaching record highs by the end of the year. While the urge to sell investments to avoid further losses can be strong, doing so could result in missed opportunities for profits. The largest gains frequently occur shortly after market corrections or significant losses, making it prudent to remain invested over the long term.
The benefits of an adviser
Navigating the market can be challenging, especially during times of volatility. That’s where a skilled and well-informed financial adviser or investment manager can make all the difference. They can help you stay level-headed during prosperous times and ease your worries during challenging ones.
In addition to providing guidance, financial professionals can help you build a diversified portfolio that can withstand any market conditions. By investing in a range of asset classes, regions and industry sectors, you can reduce the risk of all your investments being negatively impacted at the same time. This strategy not only seizes market opportunities but also provides a buffer against potential storms.
By staying invested for many years, you’ll be able to ride out any market volatility and capitalise on future growth opportunities.
* Refinitiv DataStream
** Bloomberg