When this was written at the start of 2020, we'd just come out of one of the longest upwards market trends in history. And it wasn't a gentle ease-out we experienced, and we saw record-breaking drops across several market indexes.
Naturally, this shook many new investors’ faith and caused others to rethink their investment strategy.
This is when the merits of different risk strategies might come into play and have a significant impact on your investments.
What is an investment strategy?
An investment strategy is a long-term approach that’s based on your financial goals. When deciding this, you might want to consider your financial situation, the length of time you’re planning to invest for and, of course, your attitude towards risk.
At Wealthify, we offer five different investment styles which vary based on the amount of risk that's involved. In order to provide better clarity on these strategies, here’s a quick rundown of what they are, and what they aim to do:
- Cautious – this Plan is all about minimising losses with the aim of beating inflation. It could offer more potential than sticking your money in a bank, although you’re unlikely to see the same return as our more adventurous Investment Plans. This is a Plan designed to ‘stay the course’, with small movements up and down to be expected.
- Tentative – the priority here is to limit loss, but still aim to achieve reasonable gains. Typically, there will be a larger number of shares held than in our Cautious Plans, but with more stable investments like Cash and Bonds helping to reduce any volatility within the markets. However, taking more risk for potentially improved gains means that you also need to be comfortable with potentially seeing some downward movement in your Plans when markets change.
- Confident – this Plan is a bit of a balancing act between making gains and limiting loses. It could be for those who are looking to make potential gains from their investments and who are willing to take a risk that they may see their investments go down as well.
- Ambitious – this Plan was created for investors whose main priority is to make decent-sized gains, with the outlook that they’re happy to endure the ups and downs of investing. In order to have the potential of making larger gains, you will need to take larger risks – which could mean that when times are hard, you may see big losses as well.
- Adventurous – "go big or go home" is our Adventurous Plan in a nutshell. With our boldest Plan, we invest with an even higher risk in order to maximise the potential returns. But this risk can go both ways, so in times of market downfall you’re likely to see significant bumps.
You’ll notice that we don’t say anything about which investment style is best for the short term, and that’s because investing is thought of as something that you should do with a long-term view.
This is because the longer you invest for, the more time you could have for your investments to recover from market dips, which are normal to experience.
Why would you change your risk level?
There are many reasons why someone might change their risk level, although it probably isn’t the best idea to make this decision based on an impulse or emotion.
Typically, people want to reconsider their risk level due to a change in their investment timeline or as a result of a significant life event.
Often these events alter your financial position, so they could result in people wanting to increase or decrease the risk they take within their Investment Plan.
The level of risk you choose when you start investing may remain the same all the way through your journey. As investing is for the long-term, your investment style will reflect your approach to risk and your financial situation and not factor in any current market movements.
What about during market crashes or dips?
Nobody likes seeing their investment plan dip in value, and it can make you want to quickly change your strategy towards a more risk-averse Plan. But is this the right thing to do?
Trying to stop the loss of any money is normal and sensible behaviour. But sometimes with investing, certain strategies people use might not seem rational. For example, sticking with an investment when it’s falling in price. Instead, you might want to take your money out to stop your losses getting bigger.
But try to think of it like this.
We’ve all bought something at full retail price. Let’s say you paid £100 for a pair of designer jeans. Then a week later you notice that the shop is offering a 15% discount. It’s annoying, but that’s life.
It’s the same pair of jeans, but 15% cheaper – so, do you consider buying a second pair for £85?
Well, you might think about it. But what about if they have a 30% sale? You’d be effectively saving £30 on the same pair of jeans you bought last week for £100. And at that price, you may even think about buying two fancy new pairs of jeans. after all, who knows how long this sale will last!
And that’s what happens with investments during market dips. You still have all the investments you bought at full retail price, even if they've gone down in value, but you could also have the opportunity to grab some more while the price is low.
For some people, the instinctive response to market dips is to withdraw their money. But this is the equivalent of selling your brand-new jeans at second-hand prices because there’s now a sale on.
This is how your losses become real. And that's simply because when you sell at a loss, well, you lose money. Unfortunately, it’s as simple as that.
But if you kept those shares (the jeans), then there’s a possibility they could regain their value (or come off sale) and even generate a profit over a longer time frame (by becoming vintage designer jeans down the line?
We'll admit that the metaphor runs a bit thin here, but hopefully you get the gist).
What about when the markets are strong?
You never know when a market is going to take a downwards turn and for long this could be for. So, you might want to consider this before increasing your risk beyond what’s right for your needs to try and take advantage of a rising market.
For example, when this blog was first written in 2020, we’d just come out of the longest upwardly trending market in history – with a steadily rising value from 2009-2020 – but the market crash we saw after that was sudden and extensive.
In just one month, three of the world’s largest indexes – the FTSE100, S&P 500, and the Dow Jones – each lost around 30% of their value. In a month.
And because of the way they are built, more cautious investment plans (that focus on minimising losses as much as possible, although they can't be avoided completely) are typically less negatively affected than those which are more adventurous.
Essentially, it doesn’t matter if the market is doing well or if it’s trending downwards. The idea is to aim to invest using a strategy that is right for your financial needs.
Are there other ways to manage market dips?
There are several different tactics that you could use to try and negate downwards trends in a market. The first and most obvious one is to diversify your portfolio (by investing in different types of assets or regions, for example).
At Wealthify, every single portfolio we build and manage for our customers is a global mixture of shares, bonds, property, cash, and commodities – like energy or precious metals. Doing this means that if one industry or global area gets hit hard, you could be less likely to lose all your hard-earned money. Another thing you could do is drip-feed your investment account.
This simple approach of topping it up little and often is called “pound cost averaging” and is a tactic that some investors employ to try and even out their investment performance over time.
By setting up regular payments, you could buy more investments when markets are low, and less when markets are high, which may even things out and reduce the extreme highs and lows that some investors experience.
At Wealthify, we also offer something called 'Cash Park'. This essentially means that your money isn’t invested, but instead, it is held ready and waiting for you to reinvest when you feel the time is right. This feature makes it much quicker to reinvest your money when you're ready to, helping you to make the most of the trends in market prices.
However, it’s important not to try and 'time the market' (aka, invest at the right time). None of us have a crystal ball, and markets can rise and fall at any time, for various reasons.
Instead, you might want to consider choosing a time where you feel more confident, and are also comfortable enough with your personal finances to stay calm during market downturns.
If you’re invested with Wealthify and are thinking about changing to a different risk style, then please get in touch with our Customer Care team who will be able to help you. All the information on how to contact them can be found in our Help Centre.
Please remember that past performance is not a reliable indicator of your future results.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.