Following the global stock market crash of 2008, many in the UK have been understandably cautious about where and how they invest their money. This has led to more people using the likes of Cash ISAs that they top up every now and then, rather than long-haul investment ISAs.
This method falls short of the potential earnings that you could make through investing. Cash ISAs suit many because the rate of savings is guaranteed, but if those savings rates are below inflation, then the saver is unlikely to make meaningful returns.
While there are risks involved in any investment, there are also a myriad of ways that you can mitigate those risks. It starts with looking at how safe your investment is and assessing your desired risk level going forward.
How to deal with market ups and downs
When you’re considering the possibility of investing, your first step should be to accept the reality of market volatility - or in plain language, financial markets going up and down. Investing is more often than not, profitable over the long-term, and while it can be uncomfortable to watch your investment value decrease in the short-term, you should see it as part and parcel of being an investor. So instead of jumping ship at the slightest dip in value, try to keep calm and think long-term, since it should help you smooth out the market bumps.
Think of it this way: according to Bloomberg data, people who invested for any 10-year period since 1986 until February 2019 in the FTSE 100 index have had an 87% chance of making a significant profit.
There are other strategies to help you deal with market volatility:
- Make regular investments (in the good times and bad)
Because you’ll be buying new investments regularly, you have a stronger chance of picking up cheaper investments that may have been overlooked by others. This way, you also have a better chance of growing your investment pot by accelerating the effects of compound returns - when your profits generate more profits you’ve already gained.
- Resist the urge to sell too soon
There’s a phrase that goes a little like this: ‘reacting to a drop could mean that you miss out on the bounce’. You can never really predict when any markets will recover, but what you do know is that if you sell out during a drop, then the market recovers, you’ll most likely regret your decision.
If this sounds a little too much like wishing and hoping, compare the effects of doing nothing compared to trying to time the market. The best returns typically come straight after a market dip - not being invested at that point means you will probably miss out on some of the best growth that year.
- Ensure that your portfolio is well diversified
Putting all of your money into just one market (like the FTSE 100) will not give you much protection against ups and downs in that market. You should spread your investments across different markets and regions to give you the best chance of successfully weathering any stormy periods and coming out with a profit. This is called diversification, and it’s an essential ingredient to successful long-term investments.
Passive investing is key
Once you’re comfortable with market ups and downs, the next part of the process is realising the benefits of passive investing. If you’re unsure what this is, we have written about it in further detail here.
Passive investing usually means buying funds that follow the ups and downs of a particular financial market and give investors returns similar to that market. Let’s imagine you’re invested in a passive fund following the FTSE 100 (the 100 biggest companies by market value in the UK). It’s the same as buying shares in every company in that market, except a lot easier and cheaper. Your returns will be based on how well the shares of the companies in the market are performing collectively. Over any given month some shares will be up, other will be down. Your returns will be the average of all those ups and downs. It can be a good strategy if you want to limit your risk, since the companies in question (the likes of Rolls Royce, Aviva and BP) are highly unlikely to all disappear tomorrow, taking your investment with them. No one is immune to having a bad month of course, but bad performances will usually be offset by others that are performing well. In other words, investing in passive funds is an easy way to diversify your portfolio by spreading your risk across a large number of shares.
So, how safe is your investment?
At the end of the day, all investing involves risk and you could get back less money than you originally put in. As well as diversifying, there are some ways to make sure you’re investing in the most sensible way. The FCA regulates all investment services and ensures they abide by a complex set of rules and regulations designed to stop them misleading people. Many investment providers are also covered by the Financial Services Compensation Scheme (FSCS), which covers investors’ money up to £85,000 if the provider goes into liquidation. While this should give some peace of mind, you should remember that the FSCS only covers investors against providers that are going into administration - you will not be covered for any losses incurred during investing.
Are your investments covered by the FSCS at Wealthify?
Wealthify is fully authorised and regulated by the Financial Conduct Authority and our customers’ money is fully protected by the FSCS up to £85,000.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.