How to Survive Volatile Investment Markets

The past few weeks have seen a huge escalation in the volatility of many investment markets. We’ve witnessed a number of very large daily falls but also seen other days when markets have rebounding strongly. Investment markets continue to react to the latest political and economic news with a number of significant events driving the news flow and the direction of the markets. With the conflict in Ukraine, commodity prices spiking, inflation surging and many other economic indicators outside of recent norms, it is little wonder that most investment markets are so volatile at the current time.

This is nothing new — there have been many periods where markets have behaved in this way. That doesn’t mean it’s an easy ride for investors, with many worried about their investment portfolio and the implications for their capital, income and lifestyle. So we thought we’d share some of the best tips on how to survive volatile markets, how to put yourself in the best position to ride it out how to see through the short-term to focus on the bigger picture.

1. Diversify

It’s the basic number one rule of investing but it can need reaffirming. If your portfolio contains a varied selection of asset classes and is spread across a number of countries and regions of the world, each element can perform differently at different times. So, if one is doing badly, another may well be performing well and so could help to compensate.

2. Look beyond your home market

A UK-focused portfolio might seem a sensible option for a UK-based investor. However, other areas of the world may offer a more positive outlook or could simply be better placed to help you through a period of volatility. Financial advice to help understand international markets is essential.

3. Be prepared to roll with the punches

Your attitude during volatile periods is as important as your portfolio’s structure. Economies simply cannot keep growing indefinitely and economic bumps in the road are likely to happen. Successful investors tend to be pragmatic and realistic — they invest for the long term and expect that, while there will be good times, there will also be some bad ones. A short-term downturn should not be seen as a reason to panic.

4. Look beyond the economic data

Economic data releases are backward-looking. At the start of a slowdown, figures will continue to appear positive, often contradicting our everyday experiences, as old numbers remain in the calculation. Similarly, as economic growth begins to recover, it takes a while to be fully reflected in the new data. Headlines stating “worst figures for 30 years” confirm what we have just been through. But they don’t reflect the prospects for tomorrow.

5. Cash is not necessarily king

During a period of volatility, it can be tempting to get out of the stock market and opt for the perceived safety of cash. However, inflation can erode the purchasing power of cash over time. So, while you will not lose the face value of money when invested in cash, it is not a “risk-free” option. Stock markets can fall and recover very quickly; moving out of them when you have already suffered a loss could mean missing out when they finally begin to recover.

6. Go for quality

During period of volatility and stock market downturns, high-quality, established companies tend to bear up better. A tough environment forces struggling companies to cut their dividends or release negative trading statements. Investing in quality stocks, therefore, could help you ride out some of the bumps. It is also worth noting that, if the equity market is falling across the board, this provides a great opportunity to pick up quality stocks at relatively cheap prices.

7. Assess exposure to smaller companies

Historically, smaller companies have been the worst affected during a recession. When things are going well, they can offer the possibility of greater gains for investing than their larger peers. But when things go badly, the losses can also be much greater. If volatility makes you nervous or if your portfolio is relatively small, you could consider reducing your exposure to smaller companies and perhaps reinvest into some less adventurous choices.

8. Check for over-exposure

During a period of volatility, it is worth holding on to high-quality companies in industries where demand is less sensitive to disposable income, such as food retailing, pharmaceuticals and utilities. This is because, regardless of any short-term hitches, they tend to fare better in tough times. Other industries, such as leisure and house builders suffer much more. This might be a good time for you to ensure you are not overexposed to any one sector or region.

9. Think long-term

The recent spike in investment market volatility has persisted for several weeks now and may continue for some time. However, if your portfolio meets your personal criteria and is well diversified, a period like should not cause you to change plans. Sometimes doing nothing can be the best course of action. Your plan should be looks at over many years, not just a few weeks or months.

10. Prepare in advance

Making sure that you plan your investment portfolio properly at the outset, with the help of an expert, is by far the best way to prepare for periods of volatility. Then, when volatility strikes, you can stay calm and review your situation sensibly and with confidence, rather than be panicked into any radical and potentially unprofitable changes.

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