Rollercoasters can be both gut-wrenching and thrilling, depending on whether you're gently climbing to the top of a peak or down in the depths with your world about to be turned upside down. And it can feel exactly the same with investing. Stock markets don't move in a straight line. They have their ups and downs, but it's really hard to get the timing right when you're being led by your emotions.
The fact is that the stock market has probably anticipated exactly what you're thinking, because millions of other investors are thinking the same thing as you are. So the risk is that you end up selling low and buying high. So here are a few dos and don'ts for market turbulence.
Firstly, don't panic trade when shares fall. Emotions aren't a good guide for action.
Secondly, stick to your long-term plan. The plan should cope with the ups and downs of the stock market.
Consider rebalancing your portfolio. What this means is that if shares fall, you actually buy more shares. You do that by selling some of the safer investments in your portfolio, the bonds. What that means is that you're retaining the risk that you set up in your portfolio to start with. You also benefit because when the market bounces, your portfolio will benefit more from that bounce.
Adjust your plan if your goal is out of reach. You could consider saving more if you could afford to do so, or you could extend your target date, for example.
And finally, if you've made losses, don't try and catch up by taking additional investment risk.
In certain ways, we’re closer to the market conditions of 1999–2000, when shares were overvalued and the subsequent plunge only brought valuations closer to long-term averages. After the dot-com bubble burst, returns eventually normalised but there was no market bounce.
The market’s current lower valuations have the upside of increased expected returns for some assets.
For UK investors, projected 10-year annualised returns for UK shares are down from a range of 4.8%-6.8% a year ago to a range of 4.2%-6.2% today, although return expectations for non-UK shares are up from 2.7%-4.7% to 4.3%-6.3%.
Projected 10-year annualised returns for UK aggregate bonds have risen from 0.6%-1.6% to 2.4%-3.4%, while return expectations for global bonds ex-UK (hedged) have increased from 0.5%-1.5% to 2.3%-3.3%.
The US dollar has recently strengthened, driven by the Fed’s aggressive rate hikes relative to other central banks as well as the natural flight to US Treasuries as a haven asset during times of global crisis. This means that returns for non-US investments will be muted over the short term relative to US investments.
In the long term, however, we expect these two drivers of US dollar strength to reverse, which would help non-US shares.
Overall, with improved outlooks for bond and share markets, return expectations for a balanced portfolio are gradually normalising back to historical averages. For most investors, staying balanced and diversified across asset classes and geographies remains a prudent course.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Important information
If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this video, please contact your financial adviser.
This video is designed for use by, and is directed only at, persons resident in the UK.
The information contained in this video is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this video does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this video when making any investment decisions.
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