Maintaining focus in volatile markets

For investors, it’s always a scary time when markets get volatile - particularly when they start to tumble. So what should investors be doing and should they be reviewing their investment portfolios?

Last week saw markets slide significantly, with the FTSE 100 falling to its lowest level since December 2016 and European stocks in general suffering their worst one-day fall since the Brexit vote over two years ago. Despite markets picking up somewhat towards the end of the week, the FTSE 100 is still down some 14% since it peaked in May at 7,877.45 points.

Whilst Brexit is an issue, the main driver on the world stage has been fears that a peaceful resolution to the US/China trade war is some way off, despite the initial good vibes from the Donald Trump and Xi Jinping meeting at the G20 summit. The arrest of an executive from Chinese telecoms giant Huawei certainly didn’t help matters either.

The upshot is that other markets, most notably the German market, are suffering even more than the UK. Germany is now in a bear market (having fallen by more than 20% from its most recent high) whereas the UK market dropped into “correction” territory (down by more than 10%). Germany is one of the markets that’s perceived to be most at risk from a global growth slowdown led by China. This would explain why the DAX and China are among the worst performing stockmarkets this year.

However, the fundamental issue affecting markets right now is the major shift in central bank financials. For decades Interest rates have been going down – however now they are starting to go up. Much of the current volatility comes down to this – markets can’t quite work out what it all means yet.

No doubt some nervous investors will be considering selling their equities to avoid further losses, should markets fall further. However, selling low means potentially missing out when markets rise again.

So as an investor, what should you be doing in these uncertain and volatile times? There are a few generic things that all long-term investors should do. The first is to remember that your investments are part of a long-term plan not a short term project. Markets have always seen peaks and troughs and sharp rises often follow steep falls as markets tend to overreact to events. However, history shows that long-term, investing in equities has worked out well for most people. So it may be that you need to do little, except perhaps for a little rebalancing of your portfolio.

The second thing to remember is that there is a distinction between volatility and risk. A volatile market is characterised by large, sudden movements in price, making short-term investment difficult and unpredictable.

Risk, on the other hand, is the possibility of losing some or even all of your investment. A volatile market certainly carries the risk of losses, but might also offer the opportunity of greater gains. If you can be flexible with the timing of your buys and sells, volatility isn’t necessarily bad news and indeed offers you the opportunity to invest at lower unit costs.

The third thing is to consider investing monthly. We all know the old adage that it’s time in the market not timing the market that matters. Regular investing works because it smooths the ride. If the market falls, your money will be able to buy more units because prices will be lower. However, it works the other way too – if the market is at a higher point, you won’t buy as many units at this less attractive price. By spreading the cost like this, in a falling market the average you pay for your investments over the long term is lower. There’s less overall risk to your wealth this way, with the potential to benefit more in the future.

Fourthly, you hopefully already have a well-balanced and well diversified portfolio but if not, now is the time to be diversified. However, this may be easier said than done. For example, investing in funds would seem to offer the diversification required. Yet some well-respected funds are quite concentrated, such as the global fund Fundsmith Equity, which is 65% invested in the US. Other funds are focused quite heavily on sectors eg technology.

Theoretically, in volatile times, you should be looking at more generalist funds, across sectors and geographical regions. Having said that, this could potentially lead to what is termed ‘diworsification’ – opting for a spread of less good investments, rather than proven winners that are momentarily having a bad time. Investors (and their advisers) must therefore make their own judgement on the fund manager’s ability versus the implied risk of a focused investment portfolio. Fund managers with a track record of good stock selection in all market conditions are what you need at this moment.

Beyond this generic advice, there are a few other thoughts, some of which may be appropriate for investors in certain circumstances. For specific financial advice tailored to your individual needs, talk to your financial adviser.

In volatile times, savvy investors often move from holding equities in riskier “growth” companies, such as technology firms with no profits, to defensive stocks that pay reliable dividends. Tobacco manufacturers, insurers and banks fall into this category. Another alternative is UK equity income funds. These funds aim to provide a good annual yield and are defensive by nature, so ideal for the nervous investor.

Others look at value stocks, under-appreciated companies whose share prices don’t fully reflect the worth of their assets and could be due a boost. Talking of value, many experts currently see the Japanese market as a whole as one of the cheapest world markets.

In difficult times, many investors also opt to ‘go large’, switching to large caps and moving out of smaller companies. There is logic to this, as it would seem to be a good risk reduction strategy. However, if smaller companies are unloved and cheap, they could be a more attractive proposition long-term than their large counterparts who will have a higher share price because they are expected to deliver growth. Smaller companies could also be more nimble and flexible in difficult times than their large company competitors.  

A couple of final thoughts. Firstly, investors could consider funds that offer more than equity investments. Funds with derivatives, including Absolute Return funds are often considered good options in volatile times, Secondly, this could be the moment for active funds, rather than the passives which blindly follow a stock market index.

Interesting times then as we approach the festive season, so often the time for a Santa Rally. Will we see one this year? Who knows?

Either way, if you are concerned about the current volatility and would like to discuss the implications for your investment portfolio, contact Kellands.


Don’t forget that:

Past performance is not a guide to future performance.

The value of an investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.

Changes in exchange rates between currencies may cause the value of an investment and the level of any income to rise or fall.

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