Volatility in markets often unnerves investors, but there are proven ways to benefit from periods of uncertainty.
When stocks and shares move up and down sharply, investor thoughts often gravitate towards the question of how to time their entry and exit from a market. Understandably, individuals fear that they could invest a lump sum one day only to see share prices fall significantly the next. The fear of making a wrong call in difficult market conditions can deter investors from making a decision; but there are strategies to overcome this hesitancy.
Despite tensions in the Middle East and Ukraine this year, global markets have, up to now, remained largely sanguine. Markets have displayed confidence in policymakers’ ability to steer the global economic recovery and volatility has been at record low levels. But, with the US about to end its monthly asset-purchase programme, known as quantitative easing, and a rise in interest rates expected to follow, markets could start to experience more uncertainty in the final months of 2014.
But the reality for investors is that it is difficult to time consistently and successfully the market over the long term. Some might enjoy an element of luck when they invest, but nobody knows what the stock market will do next week, next month or next year. Over the past 15 years how many investors could have predicted such significant events as the dot.com bubble in 1999, the Iraq invasion in 1993, the financial crisis of 2007/08 or the subsequent strong rebound in equity markets? The fact is that no-one can accurately predict when the next significant market event will occur.
One way to reduce the worry of investing at the wrong time is to invest on a regular basis. Investors who drip-feed their money into the market have the potential to buy more units when share prices are falling; when prices recover, they will have more units with a higher value. A lump sum investment that is phased from cash into the market over a number of months can benefit from the short-term ups and downs in a market. The advantage of this approach, at the very least, is that it reduces the worry about investing at the wrong time.
Long-term investors need not worry about timing their exits and entries into a market. Anyone who has decided to save for a pension and does not intend to retire in the near-term would be best advised to remain philosophic over the short-term fluctuation of stock markets. A long-term view of investments requires patience and commitment, but can reward those who are able to hold their nerve amid short-term fluctuations and focus on their investment and saving goals.
Chris Ralph, chief investment officer of St. James’s Place, adds that the old adage that investors should not put all their eggs in one basket rings as true today as it has before:
“Investors who diversify across different shares, sectors and regions, as well as asset classes, are more likely to be able to withstand inevitable shifts in economic and financial conditions and to enjoy returns above inflation over the long term,” explains Ralph. “Those who spread their money between different investment managers and styles can also reduce the risk of over-exposure to any one approach.”
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.