When investing, a long-term, diversified strategy – time in, not timing, the market – helps smooth out volatility and provide better overall returns.
When investing, a long-term, diversified strategy – time in, not timing, the market – can help to smooth out volatility and provide better overall returns.
We have seen the Coronavirus pandemic change the world drastically in a matter of weeks. Aside from the devastating human impact, it has affected economies and businesses everywhere, making this a highly volatile time for global markets. While this can be extremely unsettling for investors, this is not the time to act on impulse.
Whatever is happening around us, the most sensible approach is to invest for the long-term. History has repeatedly shown that ‘time in’ rather than ‘timing’ the market usually offers the best rewards.
How has COVID-19 affected markets?
After a relatively stable start to the year, equity/share markets in particular felt a negative impact of the global pandemic during late February and throughout March. But this period also brought upward rebounds following news of government and central bank stimulus. As a result, markets actually recovered some of their losses by the end of March and continued to do so during April. However, with no certainty about when conditions will start returning to normal, volatility again kicked in and is set to remain the key characteristic of markets during these extraordinary times.
This highlights the challenges of trying to time markets – while it is impossible to consistently predict the best time to buy and sell, reacting to current conditions is usually too late.
The risk of missing out on the best days
Short-term or impatient investors risk missing out on the best days in the market cycle. Those exiting the market during a downturn, for example, would miss benefiting from rebound days if the market suddenly rallies.
Let’s say you had invested £100,000 in the FTSE All-Share index for the ten-year period up to 31 December 2019 – you would have enjoyed a profit of £118,280 (excluding fees/charges) so your investment would be worth €218,280. But if you missed the five best days, returns would fall to £80,630, and would more than halve to £55,210 on missing the ten best days. Meanwhile, being out of the market on the best 30 days would have instead brought a loss of £8,410!
This illustrates how staying invested, even when markets fluctuate, usually produces better returns over the longer term.
Investment performance: The bigger picture
It is all too common to remember extreme market highs and lows without looking at the overall picture. Most will be aware of 1987’s ‘Black Monday’ global stock market crash, for example, without realising that investors in the FTSE All-share index actually realised a positive 4% return over the year.
Focus also tends to land on share market performance, particularly in one key region, such as the UK’s FTSE100 or the S&P500 in the US. However, wise investors will never have all their interests in one asset class nor in one geographical region. So when we hear about shocks in one share market, this overplays the actual impact on most investors.
Remember: past performance is no guarantee of future performance – the best asset class/region/sector/fund one year could be the worst performer the next, and vice versa.
The importance of diversification
However, even the most patient investor is unlikely to benefit from a portfolio that does not meet their needs or is overly concentrated in one area. Despite this, many British expatriates tend to be over-invested in the UK, making them vulnerable to the fortunes of UK assets and sterling.
The best strategy for minimising risk is to spread investments across multiple, unrelated areas. This should include a range of different asset classes (shares, bonds, cash and ‘real’ assets such as property) as well as geographical regions and market sectors. Diversifying in this way gives your portfolio the chance to produce positive returns over time without being vulnerable to any single area or stock under-performing.
You can diversify further with an adviser who uses a dynamic ‘multi-manager’ approach. By combining several carefully selected fund managers, this reduces reliance on any one manager making the right decisions in all market conditions.
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Establishing a suitable investment approach
As well as being well-diversified when investing, it is crucial to carefully assess your situation, income requirements, goals and timeline alongside your appetite for risk. This is best done objectively by an experienced professional who can then build a portfolio with the right balance of risk/return for your peace of mind. Your arrangements should also be structured as tax-efficiently as possible for your life abroad. Talk to a locally based adviser with cross-border experience to make the most of available opportunities.
If markets still make you nervous, you could explore a ‘pound (or euro/dollar) cost averaging’ approach. Spreading the timing of your investments over several periods can help smooth out volatility and potentially improve average returns over longer time periods.
Ultimately, a long-term, diversified investment approach designed for your unique situation is the key to protecting and growing your capital, whatever the economic climate. While staying invested usually gives the best overall results, make sure you still review your planning once a year, or sooner if your circumstances change, to continue meeting your goals.
Contact Blevins Franks for an investment review
All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice.