Ahead of the general election, prepare your portfolio for political uncertainty.
The Prime Minister Theresa May has announced that a snap election will be held on 8 June Markets rarely like political uncertainty and often prove volatile in the run up to and after any major changes, especially if there are doubts over whether the result will benefit the economy. We look at some of the ways investors can plan for any potential storms that may lie ahead.
Despite stating that there would be no election before 2020 when she became Prime Minister in July last year, Theresa May has decided to hold a snap election on 8 June due to divisions in Westminster which she claims will "risk our ability to make a success of Brexit".1
The pound, which had fallen prior to her announcement, immediately rallied on the news, while the FTSE 100 Index tumbled. Many of Britain's largest companies earn much of their revenue from overseas, so the exchange rate can have a considerable impact on their earnings when these are converted back into sterling.
Of course, no-one can accurately predict which way any currency or stock market index will move next, which is why it is important that investors adopt a long-term investment approach.
Confidence in economic stability, alongside a plethora of other factors, such as inflation or deflation worries as well as company results, can all influence how markets move. If there is no clear direction politically, or investor confidence is low because of fears surrounding major changes, such as an election or Brexit, then markets may suffer.
It may be impossible to know what the general election outcome will be or the impact this will have on markets, but investors would do well to ensure their portfolios are prepared for any potential volatility. One thing investors can be sure of, is that we can expect more uncertainty in the weeks to come.
A sensible approach therefore, is for investors to take steps to protect themselves from any potential market volatility. This applies not just to UK-based investments but to all investments, particularly with elections also taking place in France and continuing concerns over how some of US President Donald Trump's policies will be implemented.
Why diversification matters
Ensuring your portfolio is properly diversified by investing in a combination of shares, bonds, property, commodities or cash can help reduce overall risk and volatility caused by political uncertainty.
As your money is invested across several different asset classes, if one of these fares particularly badly, the overall impact on your returns will be lower than if you had invested in this asset class alone. Of course, the opposite effect also applies: If one asset class performs well, the favourable impact on your returns will be lower.
You may also want to consider holding funds invested in different geographical areas, to further spread risk and protect you from stock market falls. Bear in mind however, that this does expose you to foreign currency risk. This means that when sterling is weak, your pounds will buy you fewer foreign currency denominated investments. However, if you already have overseas investments, lower exchange rates can work to your benefit, as this will boost their value to you.
Bear in mind of course, that volatile share prices could offset any gain or loss from currency movements.
Avoid panic decisions
When the stock market rollercoaster ride can seem hard to stomach, remember that often the worst thing you can do is to panic and sell out of your investments. By doing this you will crystallise your losses, whereas if you are able to sit tight during the bad times, you may, in time, be able to benefit from any recovery.
Dipping in and out of the market and trying to pick the best times to invest is an extremely risky strategy, as no-one knows for certain which way markets are likely to move next.
Instead, investing regularly can help smooth out volatility, as your contributions will buy more shares when prices are low and less when they are expensive. Over the long run this should help ensure you benefit from both market ups and downs. Remember, however, that regular investing won't always work in your favour and you could lose out if you each time you invest the market is up and then falls.
Bear in mind that the above content is for information purposes only. If you're unsure, seek independent financial advice. As always, make sure you have as much information as possible before you make any decisions about your money. No matter how you try to protect yourself from uncertainty or otherwise, investments' values can still fall and you might get back less than you invest.
How to prepare for stock market volatility
We discuss how investors can deal with volatility in a changing markets, in an interview with Will Hobbs, our Head of Investment Strategy for Europe, and Dr. Peter Brooks our Head of Behavioural Finance.
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CLARE FRANCIS: When it comes to investing, you have to accept that there is greater risk involved than if you'd just kept your money in a cash savings account, because stock markets go down as well as up. However, holding your nerve when the ride gets rocky is easier said than done, and we know from the contact we have with our customers that volatile stock markets can be a source of concern. But if you're investing for the longer term and able to sit tight through periods of instability, stock markets should produce better returns than you'd achieve if you kept all of your money in cash. And this is why millions of people choose to invest each year.
To help explain this in more detail and look at how you can best prepare for stock market volatility, I'm joined by two of Barclays' investments experts. Will Hobbs, Head of Investment Strategy, and Dr Peter Brookes, Head of behavioural finance. So Will, if we start with you, what is volatility?
WILL HOBBS: Clare, volatility is very simply the movement of prices of whatever asset you're talking about. In terms of shares, it's generally measured in daily volatility. People also in the industry tend to equate volatility with risk, i.e. the more volatile a share price is the more risky it is perceived to be.
CLARE FRANCIS: And why do we tend to see so much volatility within global stock markets?
WILL HOBBS: Well, stock markets are amongst, of the major asset classes they're the most liquid, and by that I mean generally if you want to sell or buy you can get a price every second, every nanosecond even in some stocks. So that tends to mean that it's very quickly assimilating new information. And so when that new information changes dramatically, as in the case of kind of big political changes or big economic changes, that means that you can see very extreme volatility.
CLARE FRANCIS: And, Peter, sort of instinctively from a behavioural aspect how do investors naturally react to periods of volatility?
PETER BROOKES: Volatility always has this sort of very initial reaction of fear almost. People dislike volatility: why would you want to see prices move around so much? So the first reaction is always this isn't a good thing.
CLARE FRANCIS: And so what are the tips to sort of ride it out, because I guess that we're trying to get people to think about is viewing investing as a long-term activity and not to panic too much with short-term spells of volatility?
PETER BROOKES: Yes, you're absolutely right investing is a long-term activity, but in order to meet your long-term plan, you have to hold your portfolio every single day to get there. And that's why volatility is so scary to many individuals because it does reflect the price movements you see on a daily basis. And once you think about that your initial strategy will be look less often. Keep your focus on the longer term or whatever it is you're trying to invest for. That will make a big difference. But also just look a little bit behind the headlines.
You know, often when you see volatile markets kick in, the news media, they talk an awful lot about stock markets. They don't talk about stock markets on the dull days when they're just creeping up, which tends to be the norm, and I'm sure Will can sort of allude to that a little bit more. So actually the volatile days are not the common days, but they are the days that grab the media attention. You will see the headlines hit the news but put it in context.
CLARE FRANCIS: So it's remembering why you're investing in the first place.
PETER BROOKES: Absolutely, remembering why you're investing is always key to that and holding that portfolio for that long time horizon despite the temptation that your volatility will produce for you to recheck things and to look too often to perceive more risk and perhaps to change your strategy along the way.
CLARE FRANCIS: And in terms of investing new money, can volatility throw up opportunity or again is that sort of trying to get into the habit of investing regularly?
WILL HOBBS: Yes, certainly, I mean sometimes people can see sort of big falls in share prices and think well I'm just getting something on sale. But you've got to remember that generally markets are reasonably efficient, you know, there's lots of people trying to do the same thing and that's trying to make money out of the stock market, out of assets in general. And that means that if a share price or a market is falling that means new information is being assimilated. So you've got to be very careful to work out that you know something that the rest of the market doesn't know.
But I think to Pete's point is interesting. I mean when you look at volatility in the short term, it's incredibly uncomfortable. But, however, history tells us that over the longer term, the rewards to just being invested, diversified, it gives you a much smoother investment trajectory, and that's really because over time the world tends to grow. We invent new stuff. We get better at using that new stuff and the population gets a little bit larger. That means that corporate profits tend to grow as well. And so over time just being invested, just showing up and diversifying your assets, tends to mean that you get that much smoother trajectory in terms of investor returns, much less unnerving.
CLARE FRANCIS: And when we're talking about the time horizon, what sort of time are we talking sort of minimum of?
WILL HOBBS: Well I think the longer you can look, the better it is. Generally, I mean if you think that a sort of an economic cycle can be anywhere between five, ten years, generally the sort of the beginnings and the ends of those economic cycles can be fairly tumultuous affairs. But I mean none of us can afford to look at a 90-year time horizon, but certainly if you look at the returns from markets over that time, it tends to be in the region of sort of 5 to 7%. Now over shorter times you can find that you get better years, less good years, but generally that's been the experience.
CLARE FRANCIS: So the key tip for investors then Peter are, you know, don't check your investment portfolio too frequently and don't get distracted by news headlines and just remember that you're there for the long term.
PETER BROOKES: Absolutely, and I'd probably add one more to link in with what Will was saying that volatility is about movements in prices. That's not the only source of return you're getting from your investments; don't forget that you're also getting dividends or coupons and you're getting that income flow as well from your portfolio. And that is a lot less variable than the price on a day-to-day basis. So actually just look again at the total of the return that you're getting, because again that'll probably be a more comforting experience than just looking at the day-to-day movements of your portfolio.
WILL HOBBS: A compound interest is the eighth wonder of the world according to Einstein.
PETER BROOKES: Possibly misquoted but we'll go with it!
CLARE FRANCIS: Great thank you both very much, thank you.
And lastly, it's important to remember that investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance. And if you're unsure seek independent financial advice.
If you'd like more information on how to prepare for stock market volatility, please visit our website.
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