For financial professionals only
Please note past performance is not an indicator of future performance, investment returns can go down as well as up.
Global stock markets have experienced their fair share of economic challenges in recent years, and the horrific Russian invasion of Ukraine gives markets and investors even more uncertainty. Stock market investing is never a smooth ride, but investors willing to weather the ups and downs can be rewarded.
In the age of smartphones, social media and 24-hour news, information has become a valuable commodity. However, investors may get caught up in the latest noise and react irrationally, losing sight of why they invested in the first place. In uncertain times it’s important to remember a few basic investing principles.
It’s all about time in the market
Stock markets are an emotional beast. They react to news quickly, and without prejudice. From announcements about rising interest rates to geo-political events, stock markets will digest the information and decide on the trajectory almost instantly. Even at the best of times, trying to time these moves can be futile. By holding on through the ups and downs, investors may give themselves an opportunity to participate in sharp rallies, which could lead to better longer-term returns. Exiting the market for any length of time can have stark consequences on returns. JP Morgan’s graph below shows the impact of missing the 10 best days the S&P 500 experienced over the past 20 years. An investor’s annualised return would have been nearly half that of someone fully invested over the same period, so the implications are significant.
Disclaimer: Returns may increase or decrease as a result of currency fluctuations
Diversification
The saying “don’t put all your eggs in one basket” is worth remembering in investing. Diversification in investment terms means allocating your funds across different geographical regions and assets including things like equities, fixed income, property and infrastructure. Returns from different assets classes ebb and flow depending on prevailing economic conditions. Importantly, these don’t all move in the same direction all of the time. Diversifying means if one asset class is not doing well, the opposite is likely to be true of another. As a result, diversified investors often receive better consistency of returns in most market conditions while meeting their overall expectations.
Making volatility work for you
When investing through volatile times, making regular investment contributions can help to smooth out your investment journey, and reduce the apprehension of investing a lump sum all at once. Through the process called ‘pound cost averaging’, investors making regular investment contributions will buy fewer units when prices are rising, and more when prices are falling. This can potentially improve returns over time, and more specifically during volatile times.
Investing is never a straight-line process. The hypothetical example below from Royal London demonstrates pound cost averaging at work in a volatile market, comparing Customer A’s returns with regular contributions against Customer B who makes a lump sum contribution.
Source: Royal London, Pound Cost Averaging
Economic and geopolitical events are notoriously hard to predict. Behavioural research shows knee jerk reactions or decisions based on heightened emotions have rarely been useful investment techniques. In uncertain times, consider why you invested in the first place and whether those reasons have fundamentally changed. By riding out the peaks and troughs, history suggests patience will be rewarded. There will always be reasons to sell but as the graph below demonstrates, those with long-term horizons would have been handsomely rewarded over the past 20 years.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.