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Investing during market volatility

Investing during market volatility
David Horowitz

By David Horowitz

07 Jun 2022

2022 has seen huge volatility in markets while inflationary pressure indicates a potential recession on the horizon. However, we can expect markets to fluctuate.

Often the financial media may amplify the perceived significance of an event and its expected impact on the financial markets. Investors should not let the crisis of the day affect their long-term strategy and sentiment.

We have summarised six key points when investing at times of instability or volatility.

Capital markets have rewarded disciplined investors

Major events around the world may have an influence on stock prices. But it is difficult to predict when these events will occur or how they will impact markets. What we observe from previous crises is that stock markets usually rebound.

You can never be sure how a single event will impact stock prices

Many factors influence stock prices. Although major events and stock market movements may be related, it can be challenging to determine correlations. Also, after good or bad news, stock prices may not move in the direction investors expect. It’s not enough to identify major events in advance; you also must accurately predict how markets will react.

Reacting to a crisis by leaving the market is just another form of market timing

When investors move in or out of the market in response to an event, they are predicting when the market will have a positive or negative return. We believe markets incorporate all available information. Thus, once information related to the event is known by investors, prices have already adjusted. In addition, if you flee the market after a major crisis, you must then decide when to return to stocks. In many cases, the decision to reinvest comes after a rebound has begun, resulting in a missed opportunity. Moving in and out of the market can also incur additional costs and have potential tax implications for investors.

Dealing with the uncertainty associated with major events is one reason why investors earn a return over time

If there were no uncertainty regarding future events and the impact on stock prices, why would investors earn a return greater than the risk-free rate? While major events and their unknown impact on stock prices create uncertainty for investors, the uncertainty is a major reason why investors earn a return. Investors are better prepared to apply discipline during a crisis if they have realistic expectations, take a long-term view of markets, and understand why some investments have higher expected returns.

Responding to the latest news and exiting the market may not alleviate anxiety

Markets fluctuate daily in response to the news, and sometimes they experience significant declines. This can create anxiety for investors. However, exiting the market and then watching a subsequent rebound in stock prices can be just as unnerving. In this case, the stress of being in the market is replaced by the stress of being out of the market. A portfolio will experience daily ups and downs—but over longer periods, the odds of realizing a positive return increase. For example, over the past 40 years, nearly half of the daily returns in the S&P 500 Index were negative, while only one-fifth of the annual returns were negative. So, checking your portfolio’s value often in response to bad news may increase your exposure to short-term pain.

Proper diversification and prudent investment management linked to your financial planning can help investors endure a market downturn

Stock prices fluctuate through time, and there will be periods when prices fall. However, a major event in one market may not affect stock prices in all markets—which is one reason to hold a globally diversified portfolio. Having an understandable strategy, linked to your goals and objectives, that accounts for market declines can help you look past daily news and focus on the long-term.

When working with you in relation to your long- term investments, we seek to maintain our three core principles:

Financial planning led

  • We work with you to build your comprehensive financial plan.
  • Be it safeguarding your family’s future, funding your financial aspirations or preparing for your retirement, it all begins with a plan tailored to your needs.
  • In short, we look to understand ‘why’ you are making the investment to better inform ‘what’ the investment should be.

Centred on your objectives

  • Our focus is on understanding your current and future objectives in order to develop a clear plan to meet these and help you implement this.
  • Our advice is grounded in financial planning, which takes into account your future objectives and cashflows to determine how you should allocate capital rather than approaching your affairs with a specific product or series of products in mind.
  • Rather than just an investment portfolio, you will walk away with a plan that covers how to manage risk, structure your investments, remain tax efficient and how to futureproof this.

A lifelong partnership

  • Trust is the foundation of our values and we look to build lasting relationships along the way and meet our clients’ needs.
  • Being able to work with an advisor who understands your personal needs is vital in order for you to continue to benefit from expert advice and see your plans evolve over the years.
  • We give honest and impartial advice. We’ll only ever recommend solutions you need, and at a level of risk, you are comfortable with — which may sometimes involve challenging your ideas and suggesting alternatives you might not be aware of.

The first step towards your financial plan is an initial meeting, at our cost, to explore your current position and aspirations. There is no commitment other than an hour of your time.

To get started in financial planning, speak to our wealth management team today.

The value of your investments could go down. Past performance is no indication of future performance. This factsheet is only for general informational and educational purposes. They are not offered as and do not constitute financial advice. You should not act or rely on any information contained in this factsheet without first seeking advice from a professional. The Financial Ombudsman Service is available to handle individual complaints that clients and financial services businesses aren’t able to resolve themselves. To contact the Financial Ombudsman Service, please visit this site. Gerald Edelman Wealth Limited is an appointed representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority.


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