We have nothing to fear but fear itself. So said Franklin Roosevelt…seemingly. And so it is with the investment markets, especially at the moment. The term “volatility” is used extensively in all areas of investment, particularly in relation to equity and bond markets. For many commentators the word “volatility” can be substituted for “risk”. As in, the more a market moves up and down, the greater the risk your investment may lose capital.
However, volatility does not have a time scale built into its meaning, so to understand the real effect of volatility we must understand the times scales that are of importance to the investor.
An investor who contributed £1000 per month into a widely used UK index tracker over the first seven months of the year would have experienced a total return of 8.52% by the end of July. However, those who invested £7000 at the start of the year would have experienced a peak to trough loss of 11.52% at one point over the same period. A nervous investor may well have cashed in their chips and crystallised their capital loss at this point. Unfortunately for them, the loss was fully recovered just 36 days later and today they would be well into profit.
The real danger of volatility is that it can lead to poor investing behaviour resulting in long term capital harm. Consequently, it is the fear of volatility rather than volatility itself that can be most harmful to investors. This means we need to look to the basics when reviewing our investments:
- Only invest capital that you can commit for the long term.
- Make sure your portfolio is well diversified in all asset classes.
- Make sure you are at the right risk level for your circumstances.
- Make sure your funds are performing well and worth their cost.
- Don’t panic, time is the great healer.
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Personal Money Management is the trading name of Professional Money Management Ltd who are directly authorised by the Financial Conduct Authority.