Home Business Insights & Advice Brexit, volatility and the investor’s dilemma

Brexit, volatility and the investor’s dilemma

by Sponsored Content
7th Aug 19 9:57 am

The countdown to Brexit continues, and what the eventual outcome will be still remains a mystery. What we do know is that the past year or so has shown anything is possible and investors should always be prepared for the unexpected. Through all this uncertainty there is one thing that we can say for sure: take nothing for granted.

Whatever the eventual outcome at the end of October (or beyond), there will be winners and losers in terms of the markets.  Market volatility is often seen by many as the enemy of private retail investors, yet if carefully considered it’s possible to make it your friend.

In this article, we provide a checklist of things investors should consider during periods when uncertainty can be at the forefront of investors’ minds.

Do not make irrational decisions

As a whole, investors need to take a step back and consider why they’re investing. If the investment goal and time frame associated remains firmly in the future then you should sit tight and remain calm. It’s very easy to get swept along with a tide of emotion as markets react, but a cool and logical approach will serve you better.

While selling may be the right course of action for some, for others holding off and taking stock could, ultimately, be more beneficial. It can be very painful looking at a sea of red figures within a portfolio, but unless you need to cash an investment in – remember this – it simply remains a paper loss and no loss or gain is realised until such time as encashment. I repeat, you haven’t lost anything until you cash you investments.

Be flexible and be wary

During volatile markets, it’s crucial for investors to identify and appreciate your tolerance to potential losses. Stop loss limits and buy limit orders could therefore be worth considering.

Stop loss limits are a wonderful tool in normal market conditions but investors should appreciate they also have the potential to be your worst enemy. In times of extreme market volatility they could be triggered at prices way below the level set, due to prices plummeting and subsequently falling through that level.

For those actively seeking to benefit from the volatility, a buy limit order may be worth considering. It could potentially allow you the flexibility to pick up an investment at a significantly reduced price, compared to normal market conditions.

Remember, on Friday 24th June 2016, the morning of the Brexit result, the UK stock market was down around 8% – creating significant volatility. However, by late afternoon, the leading UK markets had started to stabilise and recovered ground to only be down at just over 3%. The market is flexible, you need to be too.

Volatility creates buying opportunities

The Warren Buffet quote of ‘Be fearful when others are greedy and greedy when others are fearful’ is possibly opportune when markets are volatile. For many, when things are going badly the natural reaction is to sell. But for those with a keen eye and stomach for turbulence, volatility can create a buying opportunity.

Just because a particular investment is down, however, doesn’t mean it is guaranteed to jump up once the storm calms. Just ask any investor who bought into companies like Kodak, Nokia and Blackberry thinking they were sitting on great opportunities for big returns. What you’re looking for is out of favour assets that have strong fundamentals but are trading below their intrinsic value. To identify these opportunities you’ll need to research and gain a good understanding of the companies involved.

Drip feed into the market

The ability to drip feed money into your investment ideas during volatile times is a perfect strategy to help navigate such conditions. Adopting a ‘little and often’ approach is an achievable strategy, and drip-feeding into an investment can help reduce exposure to volatility while also benefiting from the returns.

Drip feeding may end up costing you more in the long term, but in times of uncertainty it is often the best solution to ensure you don’t end up losing more.

Risk vs Reward

Be realistic in your expectations. If you’re saving for a specific reason or event and need to achieve a certain level of capital, you need to consider the overall time-frame and approximate level of return required to achieve it.  Does the investment being considered carry a higher degree of risk than you are comfortable with taking? If the answer to this is yes, then the investment is likely to be unsuitable and will make you feel uncomfortable; potentially causing sleepless nights and a vast amount of worry. Always ensure you are comfortable with the risk being taken and, if needed, realign and rethink your objectives.

The best investment is still a diversified portfolio.  If you’re not an expert in the markets and don’t have the time to become one you could give your money to a fund manager. Your investment will then be spread across multiple companies and industries, helping to protect you if one or even a handful of companies see their value drop. Many stock brokers will offer a range of multi-managed funds at a level of risk to suit you. The Share Centre, for example, offer cautious, balanced and adventurous multi-managed funds depending on your investment aim and level of risk you’re comfortable with. For many, having a multi-managed fund is the best way to get into the stock market.

Riding the Brexit rollercoaster

The uncertainty around Brexit has been unhelpful for business, the Sterling and investors. But we’ve seen signs of recovery, albeit often fleeting. After an initial fall, UK shares rebounded strongly after the referendum, so much so that the FTSE 100 set a new record in May 2018.

Since then, we’ve had a sustained dip over the second half of 2018 followed by a welcome bounce in prices since the beginning of 2019.  Depending on who you listen to we may also be heading for a recession. So really, no-one knows what might be around the corner. But the investor’s dilemma doesn’t mean you should be turned off investing altogether. Times of uncertainty can end up being very profitable, and investments should always be viewed as long term. There will be difficult times ahead, but that doesn’t mean we should panic. The market has seen worse and come back.

Just remember – only buy what you know and understand, and stick to your investment goals.

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