Over the last two years, investors have had to manage a highly volatile period with a pandemic taking hold, increasing prices, the Ukraine invasion and the rise in cost of living. So, it is fair to say that markets have seen their fair share of sharp drops.
As an investor, there can be nothing more challenging than seeing the value of your investments drop to the point where you feel the urge to make changes to your portfolio or even make withdrawals.
Of course, there are periods in time where it might seem like the right decision to change your investments but any changes should relate to your personal circumstances, your goals, and capacity for loss. Therefore, any investment decision that is made, should not be in reaction to periods of volatility. In times like this, it might be challenging to ignore the market noise and focus on your long-term investment goals, so here’re three data-driven reasons why you shouldn’t panic during market volatility.
1. The Longer You Invest, Stock Market Risk Drops
There is always some form of risk associated with investing and the value of your investments can drop. Despite this, in the long-term, the rise and fall of investment markets can eventually even out. As the graph below illustrates, when you invest in the long-term, the risk that you will lose money will decrease. On the contrary, holding cash can lose value in real terms as the cost of living rises, which interest rates are unlikely to keep up with.This is particularly true when we look at the current situation with high inflation and an increase in cost of living.
As an investor, there might be periods of time when you consider withdrawing your money or changing your strategy and that’s entirely normal. However, we always recommend clients to invest for a minimum of five years so they can reap the benefits of investing, compounding, and leave enough time to smoothen out any market volatility.
2. Markets Have Shown That They Can Bounce Back
When volatility occurs, it can feel as though this is a one-off event but if you look back through time, there have many events that might have made investors question whether staying invested was the right choice.
Consider the previous decade with events such as Brexit, trade wars, Covid-19 and Donald Trump becoming president of the USA. Throughout these events and periods, investments might have dropped but if you consider the long-term trend, markets have always bounced back and eventually delivered solid returns. Some of the falls might be especially sharp but on the whole, stock market trends have almost always been in an upward motion.
3. Attempting to Time the Market Can Prove Costly
It can be tempting to time the market when stocks rise and fall. Of course, everyone wants to purchase at a point where stocks are at a low price and then sell them when the price rises. As an example, if you had invested £1,000 in the FTSE 250 during the period of 1986 to 2021 and missed the 30 best days, you would have lost almost £33,000. This proves that it is not about timing the market but the time that you spend in the market.
The data, graphs and information shown above further confirms that when markets experience volatility, you should not panic. However, past performance is not an indicator of future performance either and it is not a guarantee that investments will perform as you expect them to.
Your goals should be reflected in your investment portfolio while it should also carry an element of risk but one thing you should do is avoid making rash decisions during periods of volatility, as this will give you the best chance of seeing returns on your investment.
Need help with your investments?
Although the future cannot be predicted, there are ways to better prepare yourself for it while increasing your odds of investment success. At Pyrmont, we can do exactly that. Out team of investment advisers and financial planners can develop a LifePlan focused on your life and investment goals and develop strategies that are rooted on evidence-based investing, to help you get you to where you want to be.
Contact us today to learn how our team can can help you create a brighter financial future through evidence-based investing and our life-centred wealth management approach.