There is a well known Chinese curse that says “May you live in interesting times” and we are certainly doing that right now when it comes to investment markets. Anyone who has looked at the value of their portfolio will see that it has dropped in value since the start of the year. Stock market indices have fallen and this is reflected in investment returns.
In general, political uncertainty has hit consumer confidence and companies’ profits are coming under pressure as belt-tightening means many people across the world are spending less money.
There are a few strategies you can consider to help you ride out the current storm.
Spread your risk
Make sure you have a good mixture of assets in your portfolio. This means that when one asset is performing badly the odds are that another will be performing better. You don’t want to get caught with a large amount of money in a single asset class that has fallen sharply in value. Ideally, you want a collection of investments that do a different job at different times of the investment cycle
Go for defensive funds
One way to build in some protection in volatile markets is to buy what are considered to be ‘defensive’ stocks. These are stocks that make regular profits and pay consistent dividends because they are generating large amounts of cash. In 2011 these sorts of defensive stocks performed better than average and it is expected that this will continue as the difficult times persist.
Some fund managers have built their portfolios around defensive stocks and theses funds are thus particularly well-placed to survive the stock market turmoil. The combination of the potential of capital growth and income provides a more stable return.
Keep Calm and carry on
Inexperienced investors are often panicked into selling in falling markets, when they would be much better advised to sit tight, ignore short-term performance and hold for the long term. Too many people make decisions based on market sentiment. They buy at the top of the market when sentiment is positive and sell at the bottom when it is negative, which is the exact opposite of what they should be doing.
Investment in equities should be for at least the medium term so you have time to ride out market fluctuations.
Be ready to invest more money
Investors with sufficiently strong nerves may view the recent stock market falls as an opportunity to put more money into the markets. Despite the problems in the euro zone, many European and global companies continue to perform well, generate good profits and have a large amount of cash on their balance sheets. You can now buy into funds that invest in these markets at a lower price than earlier in the year.
One fairly simple way of taking advantage of market falls is to make regular monthly investments into equity linked funds. This removes the need to judge when the market has hit a low point, which is very difficult to do. It also means that your monthly sum will buy more shares when prices are low and fewer when prices are high, thus reducing the average cost of your holding.
Take independent financial advice to ensure that your investments are in the right funds for you and the current market conditions.
Keren Bobker is an Independent Financial Adviser at Holborn Assets and writes at financialuae.me