Most people associate market volatility with risk, but there is a lot more to understand when it comes to investing and volatility.
What is market volatility?
Volatility is the measure of how quickly the prices of assets move over time.
It is a normal and necessary part of long-term investing. We know global markets are predictably unpredictable in the short term. Stock prices fluctuate by the second throughout the day, based on how much buyers are willing to pay for them and sellers are willing to sell them for.
Remembering that this is the norm is the key to any investors journey, keeping the long-term view in mind and not allowing short-term market dips to obscure the bigger picture.
Why you should not attempt to ‘time’ the markets
Timing the markets is impossible – no individual has perfect foresight to predict how the market is going to behave over the next day, week or month. Some people will get lucky and buy a stock before it rallies, then share their experiences with friends or on social media. What isn’t as widely shared, is the many more who have tried and failed.
What is known is that over the long term, asset markets have appreciated in value. Rather than timing the market, the better strategy is time in the market.
Time in the markets means remaining invested for years or decades, not trying to predict short-term market movements by trying to sell out and buy back in. This long-term approach allows investors to benefit from compounding growth over time.
The benefits of multi-asset diversification
In times of market volatility, how can you minimise risk and maximise the opportunity for long term reward?
Diversification is not putting all of your eggs in one basket. In an investment context, your investment may be split between asset classes. For example, if UK stocks experience a sell off, UK Government Bonds (Gilts) can provide support because they behave differently and in some environments increase in value when stocks fall.
Multi-asset diversification offers a full range of asset classes and geographic regions from one fund manager. The advantage is that investors assets are spread across different asset classes, regions and sectors. This could give investors the opportunity to grow, experiencing less volatility than only holding one asset or asset class.
Buying into a long-term mindset
Historical data, as shown above, shows a few significant events that resulted in heightened volatility and would un-nerve even experienced investors. These events are all very different in their own context, however, there is a common theme, markets have always recovered following a crisis.
This century, we’ve experienced events ranging from the global financial crisis to the Covid-19 Pandemic and more recently, the invasion of Ukraine. While it can be unsettling to see an initial dip and sharp movement, realising that volatility is a normal part of investing can put investors’ minds at ease when the natural reaction is to panic.
By focusing on a long-term goal and remaining patient, investors can navigate the ups and downs of the market to navigate through market volatility and continue working towards their financial goals.
If you’re a True Potential client and would like further support with your investments, you can call our Relationship Management team on 0191 500 9164.
They’re available 7am – 8pm weekdays and 8am – 12pm on Saturdays. If you’re not a client, you can call one of our experts on 0191 625 0350 to learn more.
With investing, your capital is at risk, investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.
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