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Investment strategies to cater for volatile stock markets

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Patrick Connolly

Patrick Connolly, Certified Financial Planner, Chase de Vere, the independent financial advisers with offices in Manchester, has commented on investment strategies to cater for volatile stock markets.

Investors have been well rewarded over the past nine years as stock markets have raced ahead. However, there are concerns that the tide is turning, as we have seen significant falls in recent days and a high degree of volatility. This culminated yesterday (5 February) with the American Dow Jones Index suffering its biggest intra-day loss in history, falling by nearly 1,600 points or 6.3%.

We meet many people who have too much of their money invested in shares. This is often the result of making their own investment decisions or where they’ve received advice in the past but haven’t reviewed their finances since.

It’s often fine for younger investors to hold more of their money in shares, especially if they’re paying monthly amounts into their pension or ISA. However, as you get older and the value of your investments grows, capital protection becomes as important as capital growth.

The best way to protect your money is usually through asset allocation, where you hold other investments such as fixed interest and property alongside shares. This helps you to spread risks. Nobody knows for sure which investments will perform the best and having too much money in one area that under-performs will have a negative effect on your overall finances.

It is really important to stay calm and rational. Many people make investment decisions based on short-term performance or sentiment, meaning they often buy at the top of the market when sentiment is positive and sell at the bottom when it is negative. Investors will achieve better long-term returns, and ride through the difficult times, by staying calm, adopting a long-term strategy and sticking to it without being distracted by all of the short-term noise.

To ensure that you don’t end up taking too much, or too little, risk, you should also look to rebalance regularly. This involves selling some of your investments which have performed well and now represent a larger proportion of your portfolio and reinvesting into those which have performed poorly and are now a smaller amount of your portfolio. This is particularly important during volatile times as the shape and risk profile of your portfolio can change quickly over a short period.

Brave investors may see stock market falls as an opportunity to buy. Many companies around the world continue to perform well, make consistent profits and have large amount of cash on their balance sheets. It is now possible to buy these companies at a lower price.

However, stock markets could fall further and so to help negate the risks of market timing you could consider investing monthly premiums rather than lump sums. This approach means that if investments fall in value then you simply buy at a cheaper price the following month, bringing down your average purchase cost. 

You are likely to rely on the investments you hold within your pensions and ISAs and so you must ensure you aren’t thrown off course by stock market volatility as the investment choices you make are too important to get wrong.

Stay calm and rational, make sure your investments are properly diversified and review them on a regular basis. If you are spooked by stock market volatility, or if you’re not sure what you’re doing, then you should take independent financial advice.