With stock markets continuing to fall in recent days, many investment experts have reverted to using the ‘V’ word. That’s not V for victory, but V for ‘volatility’ – a term that seems to change its meaning when share price are in freefall.
The FTSE 100 Index of leading shares has been 22 per cent more volatile than average in the past week – while since the start of the year it has been 17 per cent more volatile than the long-term average, according to Jason Hollands, managing director of wealth platform Bestinvest. But the market still remains less of a rollercoaster ride than the 26 per cent volatility score recorded when the coronavirus pandemic first hit UK markets in 2020.
According to the Oxford English Dictionary, volatile means being ‘lively’ or ‘changeable’. But in the investment world, it has become code for markets ‘getting much worse very quickly’.
Hold tight: The market still remains less of a rollercoaster ride than the 26 per cent volatility score recorded when the coronavirus pandemic first hit UK markets in 2020
Neil Bage is a financial psychology expert at consultancy firm Shaping Wealth. He says that nowadays, the word volatility in the context of investing is ‘a fancy way of saying share prices are going down’.
He adds: ‘When markets are volatile, we easily become emotionally triggered,’ stating that many investors feel the same fight or flight response when their portfolios are losing value as our ancestors did when spotting a predator. A lion in the wild, red lines on a screen indicating share price falls. Both can cause fear.’
But fear responses honed on the savannah aren’t always suitable when it comes to investing. These evolutionary traits may cause many investors to lose money by selling when they should be continuing to hold their investments. ‘Stock markets can produce unnerving shocks,’ admits Andrew Bell, chief executive of investment trust Witan. But he says that rewards accrue to patient investors and that ‘nobody rings a fire alarm at the top of the market or a dinner gong at the bottom’. So, it is extremely difficult to know when to buy shares – and when to sell.
Yet, as Bell says, all the analysis on the long-term performance of assets such as equities and bonds points to the fact that investing in equities outperforms cash savings and bonds, especially when dividends are taken into account.
So how can you stay calm during the market shocks? Financial experts say it’s a matter of holding your nerve and picking the right investment funds and stocks.
Start with history…but don’t be complacent
Hindsight is a wonderful thing, and though we do not know exactly where the stock market is going, we do know where it has been.
Darius McDermott, managing director of investment platform Chelsea Financial Services, takes comfort in what the past tells us about investing. He says: ‘As we saw during the pandemic and lockdowns, the global financial crisis of 2008 and the tech bubble and subsequent market crash of 2000, markets do recover over time.’
Looking at a five to ten-year graph of stock market performance can help investors gain perspective when markets are falling.
Myron Jobson, senior personal finance analyst at wealth platform Interactive Investor, agrees but has one important caveat.
He says: ‘History shows investments over time have a knack of producing returns that far outstrip inflation and interest on cash deposits. But that’s as long as you have a balanced investment portfolio.’
This means it is not enough to assume all portfolios will recover equally from market volatility. Jobson adds: ‘Think global, think well diversified investment funds and investment trusts as a starting point. These help to spread investment risk across sectors, markets and countries.’
Don’t meddle while markets are falling
When markets are in freefall, it is often best to sit on your hands and do nothing. ‘When stock markets are volatile, nine times out of ten, the best thing to do is nothing,’ says McDermott. ‘If you sell your investments, you are just locking in losses. If you don’t need to sell, just leave your investment portfolio alone.’ Once the dust settles, checking that your investments are still aligned with your long-term financial goals is wise, but don’t do this when in a state of panic.
‘If you are brave, you could consider buying on market dips – topping up holdings in investment funds you hope to hold for the long term.’ Witan’s Bell says that in the short term, the share price of any company may be ahead of – or behind – its true value. But over the long term, the true value and the share price should converge.
Monthly savings can help soften the blow
When the stock market is in rollercoaster mode, it can be hard to know exactly when to get on and off.
Setting up a monthly direct debit into the investment funds you like takes the emotion out of the equation. It helps to ensure you don’t have to look too carefully at fund performance day by day.
Annabel Brodie-Smith, communications director of the Association of Investment Companies, says that this strategy means that you average out the highs and lows along the way. She says: ‘The attraction of regular saving is that investors buy more shares when markets are low. It puts them in a good position when equity prices do start to rise again.’
Consider cautious investments
If you are find the ups and downs difficult to stomach, you could consider some investment funds that are cautiously managed – investing in assets other than equities.
Matthew Read, senior analyst at data group QuotedData, suggests exposure to funds that invest in bonds, whether issued by governments or companies.
Although bond prices do fall and rise, he says a good manager can ‘diversify a lot of the risk away’, thereby generating a steady mix of income and capital return. He recommends investment trust CQS New City High Yield – a fund that currently provides an income equivalent to more than eight per cent a year.
Read also recommends infrastructure investment funds, especially those focused on renewable energy. For example, Downing Renewables and Infrastructure has generated a one-year return of 20 per cent. Its portfolio comprises investments in 17 hydropower plants in Sweden, wind farms and solar energy farms.
Chelsea’s McDermott believes fund Jupiter Merlin Balanced Portfolio is a good portfolio diversifier. He says: ‘This is a £1.9billion multi-asset fund, so it gives you diversification as well as a decent exposure to equities to make the most of any recovery in stock markets.’
The fund has generated a three-year return of 13 per cent. Currently, it has nearly 85 per cent of its assets in equities, with the rest in a mix of bonds, commercial property, gold and cash.
There is an abundance of multi-asset funds, run by an array of investment houses. Via investment data website trustnet.com, an investor can look at funds according to how much exposure they have to equities. For example, there are more than 50 funds with fiveyear track records that restrict their exposure to equities to less than 35 per cent. There are another 140 that invest between 40 and 85 per cent of their assets in equities.
Read suggests £1.2billion Capital Gearing investment trust. He says: ‘Over the past ten years, it has provided annual returns in the region of six per cent, which is very respectable.’ Over the past three years, it has generated a total return of 21 per cent.
It is more diverse than Jupiter Merlin Balanced Portfolio, with bigger exposure to bonds. Dzmitry Lipski, of investment platform Interactive Investor, also likes this trust because of its holding in inflation-linked US government bonds. He adds: ‘Such bonds offer protection when stock markets fall, as well as providing a shield against inflation.’ Other trusts set up in a similar conservative style to Capital Gearing include Personal Assets (run by Troy Asset Management), Ruffer and RIT Capital Partners.
Lipski also likes gold as a hedge against stock market volatility. He says: ‘In the past gold has performed well relative to equities and other risk assets during periods of extreme economic turbulence, market volatility and high inflation.’
He suggests investors get exposure to gold through stock market-listed fund iShares Physical Gold. Over the past three years, it has generated returns of 40 per cent.
Finally…learn to live with volatility
Stock market volatility is uncomfortable, but learning to live with it should pay off in the long run.
‘While investors like consistent returns, low volatility does not always equal good returns,’ says Read. ‘It could mean that you just haven’t made or lost any money.’
Being able to tolerate a bumpy stock market ride can pay dividends in the long term.
One key step…do NOTHING!
Financial psychology expert Nigel Bage, founder of consultancy firm Shaping Wealth, believes there are certain steps investors can take when equity prices are falling.
Do nothing: While it sounds counter-intuitive, not acting is the best course of action you can take.
Learn to accept that there are things you can control and things you can’t.
Stop checking: If you have chosen to invest for the long-term, checking your investments on a daily basis is a recipe for disaster. You need to zoom out and look at the bigger picture.
Accept that you’re normal: Acknowledge the feelings you have when shares are in meltdown are understandable human emotions. Reluctance, excitement, optimism, fear, and panic – they are part of who we are. At times of market crisis, try to suppress fear and panic.