5 tips to navigate market storms

The US Election is drawing to a close, coronavirus is continuing to cause lockdowns and the Brexit deal deadline is getting ever closer.

With so many potential market moving events coming up, it’s likely that we’re going to see some stock market ups and downs, and that can spook investors.

Knowing what to do in times like this can be tricky. Do we change our investments or batten down the hatches?

At the end of the day there’s no one size fits all and what to do will depend on your circumstances. But there are some basic principles that we should all follow when the waters start to get choppy.

Here are our top five tips to help you steer through any market storms to come.

This article is not personal advice. If you're not sure if an investment is right for you, please speak to a financial adviser.

1. Don't panic

It's understandable for investors to worry at times like these. But it's important to go back to the basics and focus on the long-term potential for the stock market.

History has shown the stock market will survive and ditching it entirely often isn't the wisest thing to do.

After all, we think it's the time spent in the market that matters, not the ability to time it.

The chart below shows the value of sitting tight and riding out the wave of uncertainty. It looks at some of the biggest falls in value of the UK stock market since 1985 and how long it took to recover.

Past performance doesn't tell us what will happen in the future, but there are always things we can learn from history to make us better investors today.

For these examples we assumed you'd invested at the highest point before the market started to fall.

Value of UK stock market following drops

Past performance isn't a guide to the future. Source: FTSE All-Share, Thompson Reuters Eikon 27/10/20.

2. Check you're happy with your level of risk

During uncertain times, some people reduce the amount they're invested into shares (or funds investing in shares). We think this can be counterproductive. Investors should stick to their strategy and not deviate from their long term plan.

It's important to make sure you're happy with your portfolio and the split between different types of investments and cash.

If recent stock market falls have given you sleepless nights, you're probably taking too much risk. You could consider switching some of your investments into lower risk investments or cash.

If you want to take more risk, then you could consider topping up your investments into shares or funds that invest in a wide range of companies.

You don't have to do anything. If you're happy with your current portfolio and the split between different investments, then it might be better to sit on your hands and wait – no matter how tempting it might be to jump back in.

If you're not sure if an investment or the balance of your portfolio is right for you, speak to a financial adviser. Our advisers can check you're on the right lines, or look after all of this for you.

Find out more about financial advice

3. Tackling the income problem

This pandemic is hitting companies across the globe, in most, if not all, sectors.

Dividends are being cut, suspended or delayed. This can be an uncomfortable time for investors, especially anyone relying on this income in retirement.

Where possible, we believe you should use your cash buffer to replace the lost income. Our financial planners typically suggest that we need three to six months' worth of cash in an emergency fund. For retirees this is more like one to three years.

An emergency fund is often there to help in unexpected situations like a boiler or car breakdown. But, it can also help investors get through any market storms.

We don't know how long all this is going to last for. Cutting back on spending might also be a great help. Anything that you can save now, might be a massive help in the future.

4. It's okay to invest, but consider doing it in stages

Although lots of investors will be happy to sit on their hands and wait for the current market uncertainty to blow over, some might see the fall in market prices as an opportunity.

You'll probably have heard the phrase, ‘buy low, sell high'.

In reality this is near impossible to predict – even for the most experienced investors.

In fact, the legendary fund manager, Peter Lynch, once said “Trying to predict the direction of the market over one year, or even two years is impossible”.

Drip-feeding in to a volatile market could mean the average price you pay for your investments ends up being lower than a single lump sum investment. Investors average out the price of buying investments and benefit from a phenomenon known as ‘pound cost averaging'.

This means your investment buys more units or shares when the price goes down, letting you smooth out the returns from investing in the stock market. However, it should be remembered that if the market rises above the original price, fewer units are purchased.

5. Build a balanced portfolio

Not having all your eggs in one basket is the backbone to good investing. Spreading your money across a wide range of investments can be the anchor that will help keep your portfolio afloat through market storms.

Investments, like equities, bonds and property perform differently in different market conditions. As do different regions and sectors. Having a mix could mean you always have something working well.

Take shares and bonds. Historically, shares have delivered the best long-term returns. But share prices usually swing up and down more than bonds, and shares are usually more sensitive if the economy starts to slow down. Bonds have tended to hold better in market jitters, giving investors a more stable return when shares are slipping.

If you find you're no longer happy with the balance of your portfolio, you could consider topping up investments that haven't done as well. But only if you still have conviction in these investments for the long term. You could even use money from investments which have done better. And you don't have to do it all at once.

Gently rebalancing in stages, over time, limits the risk of bad market timing. Shifting bit by bit could be a good approach as it lets investors adjust to changes in the market as they come.

Rebalancing your portfolio could mean putting your money into investments that aren't performing great right now. This might feel painful and we don't know when the bottom of the market will be. When the tide turns, you might well be in the right place to benefit.

Remember all investments unlike cash can fall as well as rise in value, and you might not get back what you invest. When selling an investment held outside of an ISA or pension, it could lock in a capital gain or loss for tax purposes depending on your individual circumstances.

How to build a well diversified portfolio

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Article image credit: SOPA Images / Getty Images.