Many of us thought that in the modern era, we would never see the world crippled by a virus. We also never would have predicted a war in Europe on the scale of what we’ve seen between Russia and Ukraine.
But, the pandemic and the Russia/Ukraine war have shown us that life is unpredictable, volatile, and surprising.
It’s not just our day-to-day lives that have been impacted – even though the pandemic is no longer at its height, financial markets have felt the effect globally. Fear-inducing and attention-grabbing headlines have dominated the news, such as:
“FTSE 100 suffers biggest fall since June 2020 as Covid variant fears shake markets” Graeme Wearden, The Guardian, November 26, 2021
“US, European stock markets suffer worst quarter since pandemic” Elizabeth Howcroft, Business Standard, April 1, 2022
“Slower growth and higher inflation are the hallmarks of a post-Covid world” Ruchir Sharma, Financial Times, February 14, 2022
With the recent Russian/Ukraine war, news headlines became a confusing mess of conflicting advice. The same press which was telling investors to take advantage of the Russia/Ukraine war only a single month later described Russia as uninvestable:
“Buy Russia - it’s cheap” Dominic Frisby, MoneyWeek, 17 February, 2022
“Russia has become uninvestable” John Stepek, MoneyWeek, 14 March, 2022
All these unpredictable fluctuations are difficult to navigate. That’s why this article will discuss 3 of the smartest ways long-term investors like you have approached periods of volatility and uncertainty in the past to avoid financial losses.
1. Know what you’re trying to achieve
Everyone should have a long term financial plan as the backbone of how they go about their investing (our Financial MOT tool gives you a free check-up to see if you're on track to meet your financial goals).
While “making good investments to make more money” forms the foundation of all financial goals, the greatest financial plans are more specific in their aims. Otherwise, a lack of clarity can lead to financial losses during periods of volatility which could consequently, jeopardise the future stability you imagined for yourself.
Don’t be tempted to compare yourself to colleagues, friends or family. You will all typically have different goals, time horizons, and different investments. Focus on your goals, your timeframe, and your assets. Always remember where you’re trying to get to.
After developing your financial plan and setting up your portfolio accordingly, you should generally avoid changing it. The only exception is if your financial goals suddenly change.
When the market is volatile, making risky moves is where most investors go wrong. One common risky move is trying to ‘buy the dip’. This involves trying to sell out of a portfolio before it goes down and buying back in just as it goes up again. However, trying to execute this can have severe consequences on your long term returns.
As you can see in the chart below, if you missed the best 25 days in the markets over a 30 year period, you would halve your annual returns over that period. To put it in perspective, if you started with £100,000, after 30 years you’d have £417,619 instead of the £1,857,780 you’d have if you had not missed those best days.
Acting on your impulse to convert your investment back into cash in times of volatility would require you to make two near-impossible guesses:
- When to come out of the market
- When to come back in
Data doesn’t lie. Historical examples show that you are exceptionally unlikely to get these calls right. As an investor, you don’t need to try and outsmart the market. You need to embrace it and have a portfolio that suits your appetite for risk. Let the market work for you.
Remember what ‘markets’ are made of
Octopus Wealth’s clients have globally diversified portfolios, which means they have significant investments in the largest companies across the world.
When we zoom out across decades, we can see how, in the long-term, markets grow. Despite events such as the early 1970’s recession, Black Monday, the dot com bubble, the Great Financial Crisis and the Coronavirus Pandemic all causing dips in the market, they all pale in significance compared to the consistent and continuous growth of the market over time.
2. Block out the noise
At the time of writing, markets across the globe are down around 22% compared to the start of the year.
These dips are a normal part of investing as is highlighted by the chart below. It shows the US stock market returns over the last 20 years: the red dots show the largest decline in each year. Much like the declines we’re seeing from current events, these past declines will have received its own media headline frenzy when they happened. And yet, markets were still positive for 17 out of 20 years.
Source: Dimensional
It would be very easy to act on recent events and fear-inducing articles you see in the press. But this does not usually lead to successful investing in the long run. For example, those MoneyWeek articles told investors to buy Russia as the price was falling. Suddenly, they did a U-turn after Russia was removed from the majority of fund manager’s buy-lists.
Terrible events and fear-inducing headlines make it feel like you have to take immediate action. However, this does not normally contribute to long-term investing success. The financial press is usually unaccountable and allowed to publish whatever it wants, regardless of the repercussions. Keep this in mind and do not adjust your long-term plan based on headlines that change daily.
Successful investing means shutting out the noise and remaining calm during all market cycles. This can seem counterintuitive and difficult to follow, but through this approach, Octopus Wealth has helped our clients to gain - and keep - the financially secure life they desire.
3. Do nothing
Market volatility from socio-political events is not new. Throughout our lives, there have been and always will be numerous temporary market declines, recessions and crises. This time is no different.
Calm and collected investors who allow the markets to do their daily dance up and down are the ones who will be rewarded over time. By sticking to your financial plan and thinking about your long-term future, you won’t let the last 20 days control your next 20 years of investing.
Conclusion
The pandemic has taught us that life can throw curveballs at any moment, affecting the world’s financial markets and causing fluctuations that seem worrying to investors.
However, at Octopus Wealth, we’ve got countless years of experience under our belt and have seen first hand that a solid and consistent financial plan is the best option for long-term investors.
So, keep calm and stick to your robust financial plan. By learning to ride the wave of the world’s markets, you’ll not only be less stressed, but can expect to see your investments growing steadily over time. If you don't have a plan yet, a good place to start is our Financial MOT tool which can give you some free pointers and tips.
The author
Simon Cahill is a Partner and Chartered Financial Planner at Octopus Wealth, the Wealth Management arm of the Octopus Group. He is on a mission to transform the way financial advice is delivered in the UK, using technology to help people engage more positively with their finances. Book a call with Simon
Disclaimer:
This blog post is a marketing communication for information purposes only and is not intended as an offer or solicitation to buy or sell any particular financial product. Personal opinions may change and in producing this article we have not taken into consideration any individual circumstances, therefore it should not be seen as advice or a personal recommendation.
Any references to past performance should not be taken as a reliable indication of future returns. The value of an investment, and any income from it, can fall or rise. Fees and commissions may have not been expressly indicated, and you should take into account the effects that these have on the performance of a financial portfolio.
Octopus Wealth is authorised and regulated by the Financial Conduct Authority.