Stock market volatility can make for compelling TV, both entertainment and documentary, but the reality is actually very mundane. Volatility happens so investors just have to learn to deal with it and, as the cliché goes, keep calm and carry on. If that sounds like a classic example of “easier said than done”, then here are some points which might help.
Volatility can reflect changes in fact, but it can also reflect changes in sentiment
The volatility of shares or a share index can be a reflection of current events and how they are developing, but it can also be a reflection of investor sentiment. This sentiment may be based on known facts but even when it is, there’s no guarantee that the reaction is a reasonable one as investors are human and can be driven by emotion and “herd mentality” rather than calm, reasoned judgement. The best investors learn to keep their heads when all around them are losing theirs and maintain their focus on finding hard facts and exercising sound judgement in relation to them.
Long-term investors should ignore short-term diversions and focus on long-term trends
Let’s say you’re driving along a route you know well and suddenly you find yourself hitting a pothole, which you’re 100% sure wasn’t there before. Does that mean you’re on the wrong road? No, the road is exactly the one you want and in the long term it will get you exactly where you want to go, it just so happens that on this particular occasion you hit an unexpected bump in it. Similar comments apply to investing through volatility. If you’ve done your research (ideally with the help of professional advice) and you’re happy that you’re following the right investment track, then you should stay on it, even if it means dealing with a bit of turbulence in the short term.
Volatility can be a great buying opportunity
As the old saying goes “a rising tide floats all boats”, the corollary to this is that a sinking tide pulls all boats lower into the water, but that does not necessarily mean that it will drag them down to the bottom of the sea. Stock market downturns can be times of great opportunity for confident and knowledgeable investors who look for companies whose shares are being unfairly punished by the general trend.
It can be easier to accept volatility if you are appropriately diversified
Adopting the right diversification strategy can make a world of difference to the extent to which you are exposed to volatility. In very simple terms, looking for pairs of investments which perform best in opposing conditions can help to ensure that your portfolio continues to produce reasonably steady returns even when one or more of your investments is undergoing substantial volatility. Likewise, ensuring you have a spread of assets across different investment classes (shares, property, bonds…) can help to stabilise a portfolio. Diversification can be particularly important for older people who rely on their investment income to pay their bills and hence it could be especially useful for them to take professional advice on an appropriate investment spread.
Volatility does not have to destroy a pension fund
Prior to pensions freedoms, volatility could be a real issue for older people. As stock market indices dropped, the value of their pension pots reduced and hence so did the value of the annuity they had to purchase whether they wanted to or not. Now, retirees can choose whether or not they want to buy an annuity at all and if they do, they have more leeway to buy one when best suits them rather than potentially being forced to buy one during a stock market.