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Understanding volatility and the power of long-term investing – the key to investing success?

You can’t avoid volatility when investing. Find out how it can hold the key to long-term success.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Investing can seem like a daunting prospect. But getting to grips with it can be easier than you think.

The last few years hasn’t been easy for investors, and we’ve seen our fair share of stock market wobbles. There’s been a global pandemic, war in Ukraine and a cost-of-living crisis.

Despite this the stock market has historically risen over the long term. However, it’s never been a perfect line upwards. There have been and will continue to be plenty of ups and downs along the way, it comes with the territory of investing.

The rate at which it does this is called investment volatility and understanding this is key to long-term success.

This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice. Investments can fall as well as rise in value, so you could get back less than you invest.

Understanding volatility – what is it?

Volatility is usually described as how much an investment rises and falls in value over a certain period of time. The more and the steeper the peaks and troughs in a set period, the more volatile it is.

There are lots of things that affect volatility – these could be political, economic, industry specific or how well the company is performing.

Another way to measure the volatility of an investment is to compare it against something else, like a stock market index for example. This is called relative volatility.

As a very basic example, let’s say the global stock market’s volatility is 10% and your investment has a 7% volatility, your investment is 70% as volatile as the global stock market.

The power the investor holds though, is how much risk you’re willing to take. Generally, the higher the volatility and risk, the higher the possibility of reward. But remember, with more risk you could also get lower returns, especially over a shorter time frame.

Investing needs endurance

The aim of investing is to grow your wealth and to do that you need a long-term approach – this means investing for at least five years. If you’ll need the money before then, you shouldn’t be investing and should be saving it instead.

How you could beat inflation with your savings in 2023

In the short term, investors will change their investments based on latest news, trends or to take advantage of a short-term gain. This is what’s called trying to time the market, but not even the professionals get this right every time.

Long-term investing takes endurance and patience – it’s about cutting through the short-term noise. After all, good investments show their worth and demonstrate that slow and steady often wins the race.

Let’s take a look at the FTSE All-Share. Over the last ten years it’s had lots of bumps in the road. However, despite these bumps, it’s significantly outperformed cash.

The FTSE All-Share from 1 January 2008, before the financial crisis happened, rose by 113% by the end of 2022. So even starting just before one of the biggest stock market crashes of all time, over the long term (15 years in this example) the value of the index still more than doubled. This shows the importance of holding your nerve and keeping focused on the long term. Remember, past performance isn’t a guide to the future.

FTSE All-Share performance since 2008

Past performance isn’t a guide to future returns. Source: Refinitiv, 30/12/22.

Where to start?

You can’t completely avoid risk and volatility when investing. You’ll have to take on some risk.

If you can stomach more ups and downs, a higher volatility, you could potentially get higher returns. If you’d rather have a less bumpy ride, a lower volatility, you can take this route too. The important part is to stay invested for the long term as that’s your best chance of growing your wealth.

Is there ever a bad time to invest in the stock market?

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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