Investing During Difficult and Unpredictable Times

From Brexit to trade wars, Hayley Millhouse mulls the steps that investors can take to help themselves in volatile markets.

One theme is likely to stand out when investors look back on 2018: uncertainty. The year has been one in which global political and economic developments have threatened – and failed – to derail investment markets.

From the US-China trade wars and the US mid-term elections, to Brexit and the problems of Italy’s banks, recent months have provided more than enough sources of uncertainty.

Yet while these issues have caused short and often sharp market turbulence, the general trend continues to be for global stock markets to rise, as they have done for much of the past 10 years.

But what about Brexit?

With less than five months until the UK leaves the European Union on 29 March 2019, there are still a range of options on the table, with outcomes ranging from a “no-deal” to a “soft” Brexit and even a People’s Vote on the terms of the deal.

As the future shape of the UK’s relationship with Europe becomes clearer over the coming weeks and months, it’s anyone’s guess as to how markets will respond. So, attempting to predict what could happen and acting on that speculation could be disastrous.

While events can be relied on to have some effect on market movements and investor sentiment, recent history shows that it’s almost impossible to understand what, if any, the longer-term implications may be. The correlation between relatively short-term political developments and long-term market performance is far weaker than many people may think.

The 2016 EU referendum is a good example. While the immediate response to the result was dramatic, with the FTSE falling sharply, the value of the pound also fell. This helped to boost the share price of many large UK-listed companies that make most of their profits overseas because the value of their overseas profits increased when valued in the falling pound, and, in turn, this helped the FTSE to recover quickly and strongly.

Those who sold out of the market on the morning of 24 June 2016 were soon regretting it, having missed out on the gains that came with the rebound.

Leave emotion out of it

The important thing to remember is: don’t allow investment decisions to be driven by emotions such as panic, fear or excitement. Keeping emotion out of investing is easier said than done, but there are ways to stay on the right track.

One safeguard is diversification, the art of spreading your money across different assets, investment types and countries to spread and minimise risk, while still being able to take advantage of opportunities.

History shows that different assets such as equities, bonds and property, do not react in exactly the same way to a market event – some investments fall in value while others will rise. Diversification can’t protect you from losing money entirely, but it does reduce your vulnerability to market turbulence.

It is also important to rebalance your investments from time to time. As the value of different investments changes at different rates, you may end up with a lot more of one type of asset than your originally selected.

By rebalancing your portfolio – selling assets where you have too much and buying more where you have too little, you can maintain a wide spread of investments.

Consider regular investing

While some studies suggest that lump sum investments can help boost returns through having more money in the market for longer, there is an argument that regular investors benefit from pound-cost averaging. This means that regular investing can help smooth out market movements, because when prices are low, your money will buy more units of investments that can help boost long-term returns.

Either way, regular investing can be less stressful for those who worry about timing a lump sum investment. Fear of loss can put people off investing and, although putting money in the stock market should be viewed as an investment for at least five years, short-term falls in value can be distressing, especially if you have just invested a sizeable sum of money.

During times of uncertainty, regularly investing smaller amounts could lessen some of the fear of buying just before a market drop, while ensuring that you don’t miss out on the potential for long-term gains.

Keep a cash buffer

Finally, as investing should be for at least five years, it’s important to have a cash buffer that you can draw on for any short-term needs and to cover emergencies.

Knowing that you have enough ready funds to cope with unexpected expenses should help remove some of the worry about short-term changes to long-term investments.

If you’re not sure where to start, or you would appreciate expert assistance, professional financial advice is invaluable. Whether it’s from the outset, or on an ongoing basis for whenever your situation changes or if you need reassurance during uncertain times, expert financial advice may be one of the best investments of the lot.