What to do when the market changes
A guide to navigating the ups and downs of the financial markets. Looking at how the market affects investments and putting the figures into perspective.
At the moment, they are being affected by the outbreak of COVID-19 (Coronavirus) and the subsequent impact it has had on the global economy because of reduced demand for products and services.
But the rise and fall of market prices is a normal part of investing.
Market volatility can be caused by:
- interest rates
- economic outlook
- policy changes
- consumer confidence.
The value of your investment can go down as well as up so you may get back less than you originally invested.
It’s important to invest for at least 6 years to help ride out any changes in the market. That said, you can take out your money at any time.
Tips for looking after your investments:
Put market changes in perspective
Let's take a look back over the past 15 months. Having experienced a strong period of stable growth, 2020 saw stock markets take a big turn. At first glance, this fall in 2020 could look a little alarming:
But let’s take a step back and look at the same period in the context of the last six years and suddenly things might not look so bad:
There has been a strong rise in the market in recent months as the market has been buoyed by the covid-19 vaccine rollout.
Past performance is not a guide to future performance.
Income distributions impact
As a result of the reduced demand for some products and services due to Covid-19, there is significant pressure on the earnings and dividend outlook for many companies across the world. Many companies have already made cuts to their dividends and there is also an expectation there will be an increase in the number of companies defaulting on the repayment of debt in certain areas of the bond market.
The impact of this will be that for income investors distributions will reduce. The magnitude of this reduction will depend on an investor’s asset allocation. It is expected that equities will experience larger reductions to distributions than fixed income and so those who are invested in higher risk portfolios/funds should expect to see a bigger reduction to what is paid to them as income over the next 12 months than those who are invested in lower risk portfolios/funds.
Don’t try to time the market
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.
Think about regular investments
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.
Consider phasing any withdrawals you need to make
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.
Diversify your portfolio
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.
Make sure your investment plan is up to date
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.
This is not intended to promote or provide a recommendation in relation to our investment service. Any comments made are intended to provide general information only. If you would like any further information, please contact a Nationwide Financial Adviser.
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