Investing during times of volatility

In our latest blog PM+M’s financial planning director, James McIntyre, provides his insights on investments during current events…

The current crisis in Ukraine

The crisis in Ukraine is quickly becoming a humanitarian disaster, with the country’s independence at risk. Our thoughts are with all the families that have been severely impacted by this horrific war.

The impact to us may feel insignificant, however, it is our industry’s responsibility to talk about how investors should react during times of market volatility to ensure that people make rational decisions during difficult market conditions.

What should investors do?

Investors should be prepared to ride out a negative market cycle, however difficult it may seem. There may be circumstances where access is unavoidably required, but investors must generally hold their nerve and remain focused on the long-term objectives.

If an investor finds themselves in a phase of accumulation, ongoing investment contributions benefit from market volatility as, when markets fall, investors can buy more units for their money. Regular investors can benefit from pound cost averaging to potentially smooth out market volatility. Fewer units are purchase when prices are high, but more units when prices are low.

Investors who find themselves in a decumulation phase (i.e., those are accessing their portfolio) must be ready to play the waiting game as it is typically better to ride out market cycles rather than try to time them. Those who exit the markets temporarily could find themselves buying back in after markets recover, which can be risky.

Individuals who are close to, or have reached their de-cumulation phase, should hold a contingency fund to ensure any capital requirements can be satisfied from cash, rather than risk selling down part of an investment portfolio at a bad time. Furthermore, it is important to consider retaining cash to provide the liquidity to fuel ongoing income requirements for a set period, reducing the risk of having to sell down for liquidity purposes during periods of volatility.

Where should I invest during uncertain times?

We are all feeling the pinch of rising energy prices, along with the expectation of rising prices of food and commodities. Although interest rates will likely continue to rise as part of the central banks’ monetary policy to control inflation, savings rates are still unlikely to generate enough interest to compensate for inflation if it hits 5%. However, shares can be expected to generate growth and income to help combat inflationary pressures over a period. Typically, higher interest rates may reduce the underlying profitability of various companies for some time.

Diversification within investment portfolios is going to be vital for investors, as it is risky to exclusively chase ‘flavour of the month’ investments. Energy stock is a good example of this – when we had a better grasp on the Covid pandemic we saw energy stocks grow in popularity, but now, looking at the current situation, it may not seem like a good idea to have your portfolio restricted to this stock in isolation.

We are often asked whether to invest in China – the answer is simple, if we are focused on the long term: China is fast becoming the largest global economy. China already represents a huge (geographical) percentage of the global economy. So, can we really afford to pull out of this asset? Furthermore, it is better to be cautious as a lot can be said about a contrarian investment approach (i.e., buying when people are saying “why do you want to invest in this” and selling when the wider community is saying “why are we not buying this”) especially as the wider community often hears the news about a strongly performing asset after the fact.

Get in touch

Investors need to remind themselves why they are investing; it’s important to have a plan in place and bravely ‘ride out’ a difficult market cycle – holding cash for contingency and shorter-term liquidity can help. Meanwhile, diversification across assets is important and at PM+M, our Portfolio Management Service invests in over 30 funds. If you would like to learn more about our Portfolio Management Service or would like advice on investing, please get in touch using the button below.

 

 

For more information about anything in the above article, please get in touch using the button below.
James McIntyre
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