Investing in volatile markets: The benefits

In these uncharted economic times, I feel now is a good time to look at how doctors and dentists can benefit from the uncertain political landscape and the volatile financial markets that come hand in hand.

The benefits of investing in volatile markets

A falling market does not mean you should necessarily be put off investing. As Warren Buffet once said ‘Be fearful when others are greedy and greedy when others are fearful’.

It’s also worth remembering that if you are invested in the markets, a long term view should be taken and short term volatility should not cause you too much concern…that is, of course, as long as you are invested within the parameters of your chosen risk profile.

It is impossible to time the market and indeed it can be a costly mistake to attempt to do so. But over the long term, time in the market can result in excellent returns.

Investing on a regular basis

If you invest regularly in the markets (as opposed to investing a lump sum), you benefit from a technique called pound cost averaging.

Pound cost averaging means that when the markets are falling, your regular contribution will be buying equities at cheaper prices. When the markets recover, the yield from these equity ‘units’ can be quite significant.

Investing regularly in a diversified portfolio can be a powerful investment strategy, particularly for those more averse to the market timing risk that can come with investing a lump sum.

For example, by paying monthly into a Stocks and Shares ISA you not only utilise your annual tax free ISA allowance, you also benefit from the effect of pound cost averaging over the long term.

Diversifying your investment portfolio

With the behaviour of different asset classes being more unpredictable than ever, diversification is key. ‘Don’t put all your eggs in one basket’ as the old saying goes!

As some equities fall, others will rise. Holding asset classes such as fixed interest savings, cash, and property, alongside your investments in the markets, you can lower the volatility of your overall portfolio and limit the damage if one asset class falls.

Your financial adviser can talk you through how much you should have in each asset class and this will change as your attitude to risk changes.

Are you taking too much risk?

Whilst being a more cautious investor can sometimes shield you more from the effects of volatile markets, when it comes to long term investments, taking too little risk can sometimes have a detrimental effect on the growth potential of your portfolio.

If the current market uncertainty and fluctuating values are making you nervous, uncomfortable, or keeping you up at night, then now could be a good time to review your investments with your financial adviser and make sure that you are invested appropriately according to your risk profile.

Risk profiles can and do change over time. They are not set in stone. It’s one of the reasons why having a good relationship with your IFA is so important. They can amend your investment profile on an ongoing basis to take account of your changing attitude to risk. Your age, your goals, and the point at which you expect to need access to your investment funds all affect your risk profile.

The golden rule is always, if you are concerned about your investment position, contact your financial adviser!

What are your views on investing in volatile markets? Let us know by adding a comment below.

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