Don’t Panic During Turbulent Markets, By Rob Burgeman, Investment Manager At Wealth Manager Brewin Dolphin

Arguably, the most challenging part of investing is holding your nerve and remaining invested when markets become turbulent, or the economy starts to weaken. We fear we will lose everything, and it seems as if the market will continue to go down forever. Moreover, when the market is volatile, it is constantly in the headlines, with predictions of doom and gloom everywhere you turn. Investors are at the mercy of the markets, which is not a particularly reassuring thought. Currently, investors are facing the triple threat of the shocking geopolitical conflict with Russia and Ukraine, inflation levels at a level not seen for decades, and rising interest rates around the globe.

The fear of incurring major losses can make it extremely tempting to sell your investments. Yet while this may temporarily alleviate your nerves, doing so could put a significant dent in your long-term gains. Reframing how you think about investing during times of turbulence is key to remaining calm (and invested). The market pricing for any investment changes daily; it goes up or down every day, sometimes by a small amount, sometimes drastically. History tells us that we’ve never had a market that didn’t come back from a fall, albeit eventually.

In fact, volatility can be a powerful force for good because these wild swings work both ways. For example, our research shows being out of the market for only the five best days during the past 30 years would have led to a 33% lower return. Missing the best ten days would have reduced returns by a staggering 49%. So, while stock market volatility may be stressful, history shows it is better to stay invested in turbulent times because long-term returns typically outweigh short-term losses.

Here are six tips to help navigate these treacherous and concerning times

Take Solace From History and Hold Your Nerve

This is not the first time markets have crashed following a crisis, and it certainly won’t be the last. The world has endured plenty of huge shocks, from wars to deep global recessions. It is easy to succumb to panic and sell out of the market when they are falling; however, timing the markets is extremely difficult. It is almost impossible to tell whether economies and markets are suffering from a prolonged crisis, such as the global financial crisis of 2008 and 2009, or merely a nasty wobble. Investors can’t know whether markets will bounce back quickly or remain vulnerable to further slides. The important thing for investors is to set up a sensible strategy from the onset, hold your nerve and stick to it through the market turmoil. History has shown that over long enough time periods, no matter what challenges the global economy has faced, markets recover from significant downturns – and may go on to recover strongly. By leaving your money invested, investment trends show that increases the chances of it growing and building a substantial pot.

The global economy has endured plenty of adversity over the decades, and yet the stock market has continued to climb, given time. The chart below shows that if you invested £100 in the FTSE All-Share in January 1997, it would have increased in value to £278 by January 2022. This is on a ‘total real return’ basis, which combines share price changes, dividend income, and is adjusted for inflation, and before fees. Conversely, if you had put £100 in a cash savings account1, it would have grown to just £120 after adjusting for inflation.

Inflation Beats Cash

Figures from the Bank of England show that annual inflation averaged 3.6% over the last 40 years[1]. Unless your savings have been growing at or above this rate, their real value will have declined. Savings accounts typically struggle to keep pace with inflation, seeing savers lose value in ‘real’ terms. If we assume for simplicity’s sake that your money was earning no interest at all, then an inflation rate of 2.5% would reduce the real value of £100 to £53.10 after 25 years, while an inflation rate of 5% would reduce it to just £27.74.

Compounding is extremely powerful when it comes to investing. Albert Einstein described it as the eighth wonder of the world. For example, somebody earning a nominal return of 5% net of fees in year one would see their investments grow by a compounded return of 63% after ten years. After 20 years, this rises to 165%, and over 25 years it balloons to 239%. This demonstrates the cumulative effects that compounding has on capital. If you are prepared to accept the risk that comes with investing, and have time on your side, you give your money the greatest chance of growing and beating inflation over the long term.

Risk Matters

When markets are volatile, it can be a good time to take stock and consider how much risk you’re willing to take. The concept of risk and reward, where the more risk you take, the higher the reward might be, is not a new one but many investors do not know how to determine the appropriate level of risk for them.  Getting some smart advice is useful to help determine the level of risk, it would take into account the time horizon, the amount of money that the investor can stand to lose and construct a portfolio accordingly. 

What is key to any portfolio, no matter the risk profile, is ensuring it is a diversified portfolio that contains a mix of assets including equities, bonds, property, cash and other riskier investments. Each of these asset classes may perform differently in similar market conditions; some lose value, while others make gains. Over time, this helps to smooth returns. Remember, as the old investment adage goes, it is time in the market – not timing the market – which is typically key to long term gains. However, investing in assets that may fall in value, such as shares, is only suitable for those who are willing to suffer losses in the short term and can afford to leave their money tied up for years

During uncertain times, diversification is more important than ever. This means spreading portfolios across a wide range of assets, including cash, fixed interest and shares, across global markets, so that if one area performs poorly, gains elsewhere should make up for it. While volatility and uncertainty may be high in difficult times, markets move beyond this and investors can still benefit from companies with strong balance sheets and potential. No-one can know with any certainty what lies ahead. However, a wealth manager may give you the assurance that events are being closely monitored and appropriate steps will be taken to protect your wealth.

Make the Most of Tax Allowances

Another way to ensure investments are working as hard as possible is to invest in a tax efficient way, utilising tax-efficient wrappers such as ISAs and personal pensions to benefit from tax-free income and gains, which could build a substantial investment pot over time. For investments outside an ISA, gains above the £12,300 annual CGT exemption will be subject to tax of up to 20%. It’s sometimes possible to reduce CGT by offsetting losses against gains, but this can be complicated. It is far simpler to hold investments in an ISA where there is no risk of CGT being charged. ISAs also shield your money from income tax. This makes them especially advantageous for higher or additional-rate taxpayers, and for those whose investments generate a very high level of income. If you’re able to invest the full £20,000 ISA allowance every year for ten years. You could build up a pot worth just over £260,000, assuming investment growth of 5% a year after fees and before inflation. Over 20 years, the same investment could grow to £690,000, thanks to the power of investment growth and compounded returns.

Personal pensions are particularly effective at growing a long-term retirement pot as you can benefit from tax relief at your marginal rate. This can mean an extra 20-45% boost to your ring-fenced pension savings.

For higher earners, there is also the opportunity to invest through the government’s venture capital schemes such as venture capital trusts (VCTs), enterprise and investment scheme (EIS) and seed enterprise investment scheme (SEIS).  They are higher risk as they invest into young British enterprises and because of this the government provides more generous tax relief allowances.

Focus on Personal Financial Goals

As humans we are programmed to act in line with the prevailing mood, and investing is no different. Rather than getting caught up in short-term swings in mood, a better approach is to accept that markets are volatile and stay focused on your long-term goals. If your goal is to fund your retirement from stocks and you have several decades to go, you could have time to recover from any big dips. Focusing on these goals can help ensure you aren’t distracted by current events, so that they don’t prompt you to veer off course.

By leaving your money invested in the stock market, you increase the chances of it growing and building a substantial pot over the long term. However, past performance isn’t a guarantee of future performance. An adviser can act as a sounding board during periods of stock market volatility, and help you remain focused on your long-term financial goals.

Check Your Protection

Another area that is important to consider is protecting your family from financial difficulties and that isn’t just about having savings and investments to provide for the long term. It’s also about ensuring your loved ones are provided for should you suffer a long-term illness or unfortunately die. There are various types of financial protection, including income protection, life cover and critical illness cover, and it is important to ensure you have the right level of cover and benefits in place that suit your personal circumstances and those of your loved ones.

The ongoing conflict in the Ukraine has been shocking and a cause of concern for all, along with rising inflation and sharp increases in the cost of living, it is a troubling time for everyone. No matter how hard it is, emotions need to be separated from these financial decisions when it comes to investments, especially during volatile times. The secret to a successful investing experience lies in discipline, looking beyond today’s news headlines, and staying invested to harness the power of compound returns over the long term. The journey might be turbulent, but with smart advice and keeping focused on your goals, you can ride through it with composure and reap the rewards over time.

There may be further bumps ahead but cashing in your investments during a downturn will cement losses on those that have fallen, without giving them time to recover. If you have been making regular contributions to your investments try to continue doing so to benefit from long term returns, and gradually help to get your finances back on track and meet your future dreams and ambitions.

Disclaimers: The value of investments, and any income from them, can fall and you may get back less than you invested., Tax treatment depends on the individual circumstances of each client and may be subject to change in the future., Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance., Investment values may increase or decrease as a result of currency fluctuations., Information is provided only as an example and is not a recommendation to pursue a particular strategy., Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

[1] Bank of England inflation calculator