- Markets rallied into the year end, with the FTSE 100 returning 3.85% in December alone.
- Since New Year it has been volatile, but we’ve been here before.
- Volatility can be incredibly off-putting for anyone considering investing, but there are approaches that can help enormously in tough times.
Sarah Coles, senior personal finance analyst, Hargreaves Lansdown:
“Following the change in investor expectations from interest rate rises to interest rate cuts towards the end of October 2023, it has felt like markets have moved quickly. Funds invested in shares and bonds rallied throughout November and December, with returns being between 5-10% on average over that period. For bonds, that is the sort of return you would hope to get over 1 or 2 years in most environments. Since New Year though, there has been a change in investor appetite, with bonds giving back a chunk of those gains and the FTSE 100 losing value too.
While the FTSE is now only down 1.2% so far this year, it had fallen by 3.6% earlier in the month before recovering a little. Things feel volatile. This can make investing scary, with a lot of people asking themselves: is now the time to invest? Or should I wait for further falls? Or should I sell what I bought back in October as I’m in profit on that right now?
Since the start of 2020, we’ve been hit by a barrage of major news events that have moved markets. There was Covid and the government response of lockdowns and handouts, followed by the euphoria when a vaccine was confirmed as being found, and the rush to spend pent-up savings. Since then, we’ve seen Russia’s invasion of Ukraine, the Truss-Kwarteng mini-budget, a very quick interest rate rising cycle, the Israel – Gaza conflict and earthquakes in Japan. Not to mention generationally high inflation. You have to ask whether you would have been able to predict all those things, and their impact on the market.
As always, our view comes back to the old adage: what matters is time in the market, not timing the market. No one can consistently pick the top and bottom of market cycles, so you shouldn’t spend time worrying about trying to do that. Instead, try to find an approach that works in both good and bad times, that fits with your investment objectives.
Volatility is part and parcel of investing, but there are things you can do to reduce its impact on your investments.
Five strategies for volatile times
- Check you’re happy with your level of diversification
The best approach is to make sure you have a diverse portfolio that matches your objectives, and then hold on through the volatility for the long-term growth. However, don’t assume your portfolio is diverse: revisit it. Over time, growth in some areas and falls in others can unbalance it, so check you’re comfortable with your holdings.
- Buy into long term growth stories
A falling market will drag almost everything lower, regardless of the prospects of the business, so when the market pulls back, there will be some companies with sound fundamentals you may want to consider.
- Protect your allowance right now: invest whenever you like
If you’re not keen to invest your entire ISA allowance right now, you can still protect your allowance. You can open a stocks and shares ISA and park the money in cash, then gradually drip feed it into stock market investments when it suits you best.
- Drip feed cash into next year’s allowance
A useful approach in difficult times is to start regular savings into an ISA. You can make payments from £25 a month, and then top up with lump sums throughout the tax year when it makes most sense for your finances. Alternatively, you can spread ISA contributions through the tax year by investing £1,666.66 a month. This means your money goes further during the dips, and benefits through the rises.
- If you’re eating into your pension pot, consider ISA income alternatives
When you’re drawing cash from your pension, the most sensible approach is to take the natural income it produces. However, some people choose to take more, and some have no alternative at times when dividends are unreliable, so they end up nibbling into the capital instead. This can be very risky. You’re eating into a larger percentage of your pot when prices fall, and this will continue to have an impact even when it recovers. If you have ISAs alongside your pension, it gives you far more flexibility. You can draw income tax free from stocks and shares ISAs, or you could dip into cash ISAs to make up the shortfall and refill the coffers when better times return.”
Three funds to consider
Hal Cook, senior investment analyst, Hargreaves Lansdown:
Troy Trojan:
“The fund’s investment objective is to grow investors’ capital (net of fees) ahead of inflation over the long term, as measured by the UK Retail Prices Index. Manager Sebastian Lyon likes to keep things simple. He aims to shelter investors’ wealth just as much as grow it.
To do this, the fund’s constructed around four ‘pillars’. The first contains large, established companies Lyon thinks can grow sustainably over the long run, and get through tough economic conditions. He’s tended to focus on companies based in developed markets, like the UK and US.
The rest of the fund is made up of investments that could bring some stability to the portfolio during more difficult markets. The second pillar is made from bonds, including index-linked bonds. The third pillar consists of gold-related investments, including physical gold. Gold often acts as a safe haven during times of uncertainty and can potentially perform well if inflation takes off or key global currencies weaken. The final pillar is cash, which offers important shelter when stock markets stumble.
Pyrford Global Total Return
Fund manager Tony Cousins and the experienced Pyrford team have three key aims. Their first is not to lose money over a 12-month period. Their second is to deliver an inflation-beating return over the long term, and thirdly, to do this with low volatility – fewer significant ups and downs in value than a fund invested entirely in shares.
The team invests flexibly in different types of investments. They aim to keep things simple though, so they typically focus on global shares, government bonds and cash. The shares are expected to perform well and generate most of the fund’s growth over the long term, but they can be quite volatile in the short term. The bonds and cash are expected to perform differently and bring some stability to the portfolio.
This could be a good option for a more conservative portfolio, or a way to bring some stability to a broader investment portfolio.
Invesco Tactical Bond
Fund managers Stuard Edwards and Julien Eberhardt hope to provide some income and capital growth over the long term, while trying to keep losses during periods of market stress to a minimum. This fund only invests in bonds, so isn’t as diverse as a multi-asset fund. However, the managers do invest in lots of different types of bonds from around the world, meaning it isn’t reliant on one specific area to do well.
Unlike some other bond funds, the managers are not purely focused on income, instead think the overall return is more important.
This could be a good option to diversify a more adventurous portfolio, especially one focused on shares.”
