How might you react to swings in stock market prices?
Investing during market volatility

Investing during market volatility

How might you react to swings in stock market prices?

Market volatility

Volatile financial markets are an inevitable part of investing. On a day-to-day basis the swings in stock market prices can be significant; however over the longer term things have tended to smooth out with daily volatility having a lower impact on overall portfolios This said, whilst this has happened in the past it's may not necessarily happen in the future.

The key questions though for many investors are often:

  • Should I hold steady?
  • Should I sell?
  • Should I invest?

A time to sell or hold steady?

Turbulence in asset prices can be unsettling for investors. Whenever financial markets suffer periods of heavy losses and the newspapers are full of gloomy headlines, there’s a temptation to sell parts of your portfolio and retreat to cash, or other perceived safe havens.

A diversified portfolio and a focus on the long term are often better defenses than trying to time the market.

How to prepare for stock market volatility

We discuss how investors can not just survive, but thrive in volatile markets, in an interview with Will Hobbs our Head of Investment Strategy for Europe, and Dr. Peter Brooks our Head of Behavioural Finance.

An opportunity to invest?

Attempting to time the market can be a high risk approach, especially when compared to making ongoing regular investments. If you think it could be an opportunity to invest while share prices are lower to potentially make higher returns over the long run - just be mindful that prices may fall even further, and that past performance isn’t a reliable indicator of future returns.

Coping with market volatility

Whenever the prospect of a sell-off seems to be particularly severe, there is a temptation to reduce exposure to the market. Once the threat has diminished, we can buy back in, hopefully at lower valuations.

However, it is almost impossible to distinguish between a genuine, imminent crisis and a mere market wobble over an event that ultimately proves far less serious than anticipated. As a result, investors who spend too much time waiting for the right moment to invest may miss out on many of the gains.

For example, over the last five years, some investors have kept a large part, or all, of their cash on the sidelines. In waiting for the global economy to become a safer place, they have missed out on very significant gains in most asset classes though of course they might have lost.

The implication is that unless markets are clearly extremely overvalued, your best approach may be to stay invested and try to manage the psychological effects of high volatility. That’s assuming, of course, you are investing for the long term.

Focusing on the long term is more easily said than done, but adopting a sensible strategy of diversification should temper the volatility of your portfolio. This means both diversifying within asset classes and among asset classes.

For example, a fully diversified portfolio of stocks will be less volatile than holding just a handful of stocks. No matter how effectively you diversify though, your investments can still fall in value so you may get back less than you invest.

Investors should also consider whether they want to diversify their stock holdings globally, rather than confining themselves to the UK market. In doing so they could benefit from the different performance of international markets.

Note, however, that international diversification can expose investors to another form of volatility: foreign currency risk. This is where the value of investments can fall owing to a decline in the sterling value of foreign currencies.

Helpful Tools

When you invest with us, we’ll support you with cutting-edge research, independent analysis and useful tools to help you review the market and feel more confident when making your investment decisions, including;

Stock alerts – Be the first to hear when a share price reaches a certain level, or rises or falls by a certain amount or percentage. You set the share price and price movement you want to monitor, and we’ll send an email notification if and when it happens.

Market insight alerts – Receive free market movement information including a daily pre-market report highlighting stocks to watch; a daily report keeping you up to date with the latest newsworthy events in the market; a weekly summary of key dates and announcements for the coming week.

Order Types - When you buy or sell shares, you can set conditions on how the investments are bought and sold – e.g. buy or sell at a certain price or time – using order types. These are advanced tools that help you manage your investment strategy effectively, even when you’re not actively watching the market.

Henk Potts’ Market Review – Henk Potts is Barclays Global Investment Strategist. You can listen to, or read, his weekly market review in which he analyses a wide variety of asset classes, including equities, currencies and commodities, as well as ascertaining and explaining the effects of macroeconomic changes on financial markets while on the move.

Investing and trading articles – We present the latest market movements, key trends and industry analysis.

No matter how you use our market insights and tools, investments still carry risk. If you’re unsure about whether an investment is right for you, please seek independent advice.

What’s Next?

If you’re ready to invest and add to your portfolio, just remember that all investments can fall in value and you may get back less than you invest.

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  • The value of your investments can fall as well as rise and you may get back less than you initially invested.
  • Investing is not for everyone, if you are unsure please seek independent financial advice.

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