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How to trade in a volatile market

October 2017


Tags: Macro Economics

Everyone who invests in the stock market has to deal with some measure of volatility: the fact that their investments will go up as well as down.

In times of global uncertainty, the possibility of volatility is higher than usual, meaning that many investors have had a rollercoaster ride.

Events such as the Brexit vote, the election of Donald Trump, and global tensions in areas such as North Korea have all created volatility. Fang Xinghai, Vice Chairman of the Chinese Securities & Exchange Commission has gone so far as to describe volatility as “the new normal” and has said that we should “get used to it”.

 

How experts are dealing with the ‘new normal’

When volatility occurs, expert fund managers advise customers to focus on the horizon.

 “Volatility is tough but as a long term investor, our investment strategy does not react to short-term noise”, says Austin Forey, an expert in managing emerging market funds at JP Morgan. “We like to keep things for a long time and focus on buying stocks that will survive, keep growing and maintain their competitive edge.” He says that strong companies will still outperform their competitors.

Richard Turnill, BlackRock’s chief investment officer, advises investors to look through short term volatility to long term gain. “Underlying economic trends point to a sustained low-volatility regime that we believe favours equities,” he said.

 

Learning from history

As well as learning from the experts, who are finding opportunity in today’s markets, individual investors can take heart from historical performance figures that show that, over the long term, investment almost always wins through as a way to increase the value of your money. Figures from the latest Barclays Equity Gilt Study show that equities have outperformed cash savings in almost every decade since the beginning of the 20th century. The figures also show that the length of time for which you hold the investments matters – the longer the timeframe, the less the volatility matters, and the more likely that equity holdings will outperform gilts or cash. If you invest for two years, equities have a 68 per cent likelihood of outperforming other assets, and this rises to 85 per cent if you hold them for 18 years.

Investing in a volatile market can also be very rewarding, see our short video on how risky is investing?

Smoothing the ride

As well as holding equities for a long term, choosing shares or specialist funds that concentrate on dividend-paying stocks could help you to ensure that your portfolio performs in difficult times. Strong, cash-generative companies with a good record of dividend payouts could give a boost to your portfolio, especially if you reinvest the dividend payouts. The Barclays study shows that reinvesting dividends has a huge effect on the performance of an investment portfolio, with one hundred pounds invested in equities at the end of 1899 worth just £195 in real terms without the reinvestment of dividend income. With reinvestment, the portfolio would have grown to £32,050.

Another way to reduce your stress about investing at volatile times is to set up a regular monthly investment plan. This takes the stress out of trying to time a jumpy stock market, so that you invest on the best days and not on the worst. You might buy shares one month when the investment is up, and the next month when the investment is down, but this should average out over time.

 

Don’t give up

Some of the main lessons that can be learned from experts and history are that volatility can be ridden out in the long term, and that many managers see it as an opportunity. So, while it can be hard to watch the value of your investments swinging up and down, by ensuring you have a well-diversified portfolio, income-producing shares, managers you trust and a long term view, a bumpy ride can still be a profitable one.

 

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Selftrade does not provide investment advice. This article is the authors view and is not the view or opinion of Selftrade and Selftrade accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. We do not provide advice or make recommendations about investments. If you have any doubts about the suitability of an investment, you should seek advice from a suitably qualified professional adviser.

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*Source: LIBF & 7IM, 2018.