A number of factors, such as economic uncertainty or political clashes, can sometimes lead to dips in the performance of your investments. Nobody wants to feel like they have missed out and wondering what to do is natural. Three essentials to remember for investors are:
- Keeping a cool head and staying with your strategy
- Remembering that taking more risk may lead to more profit
- Considering drip feeding to snap up the investment bargains
Keeping a cool head will help you stick to your strategy
When it comes to investing, it can be easy to look at political events and panic. This is especially true the first time you see your investment plan performance drop. Reacting with your heart is a schoolboy error known as ‘emotional investing’. Emotional investing is definitely something to avoid. It means that you are more likely to lose any profit you have already gained, and - more importantly - miss out on the market bounce when it recovers. The time when the markets bounce back from a fall is usually when investors make the most profit.
When you take out your money during a market downturn, the loss becomes ‘real’. However, if you leave the money in, and stick to your long-term strategic plan, any loss is just numbers on a screen which go up and down over time. Like the weather, the markets have sunshine and showers, but by throwing away everything at the first sign of rain is not sensible. If you invest for more than five years, you are highly likely to make a profit. This has been shown throughout history time and time again. For example, if you had invested in the FTSE 100 index (Financial Times Stock Exchange - a standard UK fund which has a slice of each of Britain’s largest 100 largest companies) for any 10 year period from 1986 onwards, you would have an 87%[1] chance of making a gain.
Especially for those people who are experiencing downturns for the first time, it is important to remove emotions from the equation, and stick to the long-term strategy. More often than not, staying on track proves to be the better option for investors. Back in 1991, Seth Klarman (described by CNBC as an “Investing legend” and often compared to Warren Buffett) wrote in his book “Margins of Safety” about the pitfalls of this behaviour.
‘Successful investors tend to be unemotional.... By having confidence in their own analysis and judgment, they respond to market forces not with blind emotion but with calculated reason…Emotional investors and speculators inevitably lose money’. S. Klarman, 1991[2]
Klarman’s description of how emotional investing loses money is illustrated below:
Source: S. Klarman
To avoid falling into this trap, remember that volatility is a normal part of investing, history has seen some big market falls, but a long-term investor will almost always come out on top. With Wealthify, your Plan has been created by an experienced team of investment managers. It is designed to withstand the pressures of market stress, using a wide range of tried and tested techniques.
Stocks and shares usually perform better over the long-term
Market ups and downs – or ‘Market volatility’ - is a normal part of investing. While some people feel nervous during downturns, other investors actually enjoy them as opportunities to make more profit. Everyone is different, and this is why we offer five different types of Investment Plan: Cautious, Tentative, Confident, Ambitious and Adventurous.
Some plans (such as Ambitious and Adventurous) follow the market ups and downs more closely, whereas others (such as Cautious and Tentative) have less exposure, as they focus more on bonds and cash equivalents. If you experiment on our investment calculator, you will find the riskier investment plans are projected to make more profit over the long-term. This is thanks to a variety of factors including compounding dividends, which outweigh the downs of the market and profit from the ups over the long-term. This is very interesting for investors who would like to make a larger profit and have a lot more time to invest. It is also a common strategy for pension funds, who invest mostly in stocks and shares when the pension holders are young, to maximise their projected profits by the time they are ready to retire.
Regular drip feeding means you can buy more for less during downturns
One of the best things you can do to smooth out any lows in your portfolio performance is to add regular payments to your plan. This is known as drip feeding, or the economic term is ‘pound-cost averaging’. By adding ‘little and often’ to your portfolio, you can take advantage of the market ups and downs, buying investment opportunities when they are cheaper and profiting as the markets rise again. It is the investing equivalent of snapping up a warm winter coat in a summer sale.
Drip feeding is one of the best ways of smoothing out the ups and downs in your investment plan. Of course, there are no guarantees when it comes to investing, but if you’re worried about market drops, this is one way to help stabilise your performance.
Here at Wealthify, you have the option to set up direct debits every month, starting with a little as you’d like. It’s easy to do online, or if you would prefer, our friendly customer service team can walk you through it.
There are so many more reasons to stay invested
Staying strategic, understanding volatility and snapping up bargains with drip feeding are three important things to remember. Almost invariably, investments tend to perform better than cash savings over the long term, so no matter the political events, remaining invested for a number of years could potentially help your money flourish.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
[1] Based on a calculation made by our internal team from Bloomberg data
[2] Seth Klarman, (1991), “Margins of Safety - Risk-Averse Value Investing Strategies for the Thoughtful Investor”, Harper Business
