What to do when the market changes

Unexpected changes in the market can cause price fluctuations and is a completely normal part of investing. We sometimes call this “market volatility”.

Market volatility can be caused by:

• interest rates
• inflation
• economic outlook
• policy changes
• consumer confidence.

Let's look back at the markets' performance between July 2022 and August 2023.

Markets had a difficult first half of 2022, but have been gradually recovering. The main driver of market movements has been increases in interest rates in Western economies in response to high inflation that has proved stickier than initially expected.

Changes to the markets’ interest rate expectations caused the price of fixed income assets to decrease, because of their inverse relationship. However, the economic data, especially in the US, has held up despite the rises in interest rates which means equity markets have been on an upward trend for the last year.

Inflation was initially driven by high post-pandemic spending against constraints on the supply side, where there were shortages of many items. For example, in car manufacturing a shortage in semi-conductors impacted the ability to build enough new cars. This was then further impacted by the Russian invasion of Ukraine, which heavily affected areas such as wheat, gas and oil, leading to spikes in energy inflation last winter and food inflation, which still continues.

Meanwhile, the US Federal Reserve, the Bank of England and other central banks have been steadily increasing interest rates in response to higher inflation and low unemployment.

This has however led to reasonably positive returns from equity markets, which have benefitted from ChatGPT demonstrating the power AI could have in increasing productivity, which led to firms that have investments in AI having particularly strong returns. Nvidia, for example.

There have also been some corrections, such as in March 2023, where markets fell as a loss of confidence in Silicon Valley Bank and Signature Bank in the US sparked concern over the banking system. This was followed by the takeover of Credit Suisse by UBS after investors lost confidence in the European giant.

Equity markets performed better than fixed income markets in the last year. Fixed income assets were impacted by the “mini-budget” in September 2022. This mini-budget led to a loss of confidence in the UK from the markets and resulted in both the UK currency and UK Gilt markets losing value. After an initial recovery, the fact that inflation has proved to be stickier than expected has led to more interest rate rises, which are negative for fixed income assets.

This graph shows how the value of an investment in equity (IA Global, which is a measure of global equity returns) or fixed income (IA UK Gilts, which is a measure of the UK Government Bond returns) fluctuated between June 2022 and August 2023.

We've also provided the data from this graph in a table below.

If you can't view the whole table, swipe or scroll to show more > > >

But let's take a step back and look at the past 6 years to see the whole picture.

Although there have been periods of volatility in the markets (one of which we are currently experiencing), looking longer term there’s been a strong rise in equity market performance.

The recent falls in fixed income reflect the change from almost zero interest rates to the current market view where UK interest rates are at 5.25% (as of 31 August 2023), with the potential to move higher based on data from the Bank of England. This is a much more interesting starting point for fixed income, given there is now a higher level of income being paid and potential for interest rates to fall in the future. Both of which would support future returns from fixed income.

Markets will be following future inflation data closely, as central banks fight sticky inflation to determine the likelihood of recession and what this means for fixed income and equities.

This graph shows how the value of an investment in equity (IA Global, which is a measure of global equity returns) or fixed income (IA UK Gilts, which is a measure of the UK Government Bond returns) fluctuated between August 2017 and August 2023.

We've also provided the data from this graph in a table below.

This table shows the same information as the graph for investment in equity (IA Global, which is a measure of global equity returns) or fixed income (IA UK Gilts, which is a measure of the UK Government Bond returns). It tracks the performance of equity and fixed income investments between August 2017 and August 2023 in 6 month intervals.

If you can't view the whole table, swipe or scroll to show more > > >

No one can predict what the markets will do next.

Selling your investments when prices have fallen could result in a permanent loss. Fund managers work hard to exploit these downturns in the market. Their aim is to ensure your investment makes the most of any opportunities during uncertainty.

By investing on a regular basis, you'll buy assets at a different price each time you invest.

This can help smooth out the impact of the highs and lows of market changes. Regular payments into your investment may help increase the chance of purchasing assets at a low price.

If you know you’ll need access to your money in the next 6 months, taking it out gradually may help.

When the market is volatile, phasing withdrawals may help:

• Reduce financial loss, as investment values may be changing quickly.
• Minimise inconvenience if a fund suspends trading, meaning you temporarily cannot access your money.

In a volatile market, a fund may temporarily suspend trading. It allows funds to dispose of assets in an orderly way, protecting remaining investors in the fund. This is quite common in property funds, where the underlying assets aren’t easily tradeable and take time to dispose of.

If a fund you've invested in gets suspended, it may take longer than usual to make withdrawals from the fund.

A well-constructed, diverse investment portfolio can help minimise investment volatility.

You can diversify your portfolio by:

• investing with different assets and fund managers
• investing in a multi-asset fund. Our Primary Fund range, provided by Aegon, invest in a range of assets, across a range of geographical regions.

If your investment plan suits your current needs, it may help you ride out any changes in the market.

It's important to:

• regularly review your investment portfolio, and
• change any parts of your investment plan that no longer suit your needs.

For example, when markets are volatile, you may review your attitude to risk or any planned purchases.

Your investment plan should be in line with your:

• attitude to risk
• ability to absorb loss
• need for accessibility
• time horizon
• investment goals.

Call or complete the online form to book a video or phone appointment with one of our financial advisers.