As savings rates continue to frustrate rather than elate, stocks and shares have proven to be an increasingly popular destination for fed-up savers in recent years.
However, as last week's sudden and significant falls in the FTSE 100 and other stock markets around the world ably illustrated, exposure to the markets comes with an associated exposure to risk. The value of investments can go down as well as up, and unfortunately, when markets are as unpredictable as they have been of late, there is an even greater risk of suffering an investment loss.
Yet while there are no cast-iron methods to counter the threat of market volatility, there are some things that investors can do that could help to swing the odds in their favour. Here we take a look at some of the approaches that investors could consider.
As nobody can consistently predict which asset classes or sectors will perform best, it is vital that investors avoid putting all their eggs in one basket.
Having too much money in one area that under-performs can be catastrophic, so you should always try to spread your money across different assets, such as equities, fixed interest, commercial property and cash.
The easiest way to achieve this is by investing in a diversified range of investment funds, or perhaps a single multi-asset fund, which itself splits investments across different assets.
One of the biggest mistakes people make is to base their investment decisions on what is happening in the short-term – this means they often buy at the top of the market when performance and sentiment is positive and sell at the bottom when it is negative.
Adopting a long-term strategy and sticking to it can usually be relied upon to deliver a better return than making knee-jerk reactions at the first sign of potential trouble.
Many experts suggest that the best time to invest is just after a fall in the market. The price of some companies that continue to perform well will have been dragged lower by the wider malaise through little fault of their own. Seek out these companies and buy at a lower price than a few weeks ago.
When markets are volatile, judging when is best to invest is nigh on impossible. However, by making regular investments, rather than investing a lump sum, it is possible to help smooth market fluctuations. It also means you are not exposing all of your capital to the risks involved straightaway.
By investing regularly, money is effectively drip-fed into the market, usually each month, which means you do not buy everything on the same day at the same price. Instead, when prices are low your money will buy you more, although of course this will be balanced by when prices rise, and you get less. While your investment may or may not eventually enjoy greater growth than if you had invested a lump sum at the outset, this method of investing, known as 'pound cost averaging', is considered to be a safer bet.
Keeping an eye on your investments to ensure they continue to meet your objectives and attitude to risk is even more important when the market is moving rapidly. The focus and risk profile of a portfolio can alter significantly when the market is volatile, so you may need to adjust your holdings to keep your overall aims in sight.
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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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