As 2022 draws to a close and we look ahead to 2023, commentators and investment houses have begun to share their forecasts and expectations for the year ahead. With headwinds including the ongoing Ukraine-Russia conflict, a cost-of-living crisis and global recession expectations, it’s safe to say that one of the only certainties for next year at present is that uncertainty is here to stay. In this Insight, we look at three things to remember when investing in uncertain times.
Don’t lose sight of your investment horizon
It can be disconcerting when you’re inundated with headlines and news coverage on investment markets, particularly when the news is negative.
However, most investors aren’t investing with a 6-month time horizon. In fact, investors are usually advised not to invest for less than 3-5 years given the volatility that investment markets can display.
With this in mind, let’s say you’re investing for 7-10 years. You’ve hopefully selected your investments based on this time horizon and on which areas of the market you expect to perform well over the period. Now, ask yourself, has your 7-10 year outlook of that particular market or sector changed because of short term market events? More often than not, the answer to this question is no.
Financial markets move; they rise and fall every day. Make sure that you have a good handle on your investment cases and use them to assess your investments against market conditions. Sometimes, you may need to adjust. Other times, you may be better off just letting things run.
Diversification is key
You’ve heard it before and no doubt you’ll hear it again; don’t put all your eggs in one basket. This advice is commonplace for a reason. When it comes to investing, diversification is one of the best ways to manage investment risk and the good news is, there are many ways you can approach it.
First, let’s think about asset allocation. Whilst not the only ‘risk asset’, equities are generally considered to be the driver of risk and return within investment portfolios. Equity markets can be volatile and so the greater your equity exposure, the more your portfolio might rise and fall in keeping with markets. If you want to reduce the extent to which your portfolio rises and falls, you might want to consider adding diversifying assets to your portfolio. Traditional examples include bonds (this is where the 60:40 equity-to-bond concept comes from), property or other alternatives like hedge funds, precious metals or commodities.
Second, let’s think about regional allocation. Not all markets are created equal. Whilst yes, equity markets are usually the main component in a portfolio, the regional allocation of your portfolio matters too. A portfolio where 100% of the equity allocation is invested in developed markets like the US or Europe is going to behave very differently to one where the equity allocation is invested in emerging markets. Be mindful of your risk allocation on a regional basis too.
You can apply this same logic to styles or sectors– if you’re fully invested in a particular sector (e.g. construction, consumer staples, financials) or a particular style (e.g. value, small cap, growth), your fortunes will be tied to the relative success of that sector or style. Diversifying across sectors or styles can give you more balance in both risk and return.
Lastly, think about what you’re buying under the bonnet. Being mindful of your concentration is an important step to achieve good diversification. At TILLIT, we’re focussed on funds; we believe that when used as part of a robust investment strategy, they deliver the range and diversification required by long-term investors.
A classic stock investor (on a personal level) might have a portfolio of 20-25 companies. An actively managed fund might have anywhere from 20 to 100+ underlying stocks. Let’s say that you have 10 funds in your portfolio, you’re then likely to have exposure to at least 200 underlying companies. Do bear in mind, however, that there are other things to consider when investing in funds vs. stocks, such as trading costs and management fees.
Timing the market perfectly is impossible
Every investor wants to find the right moment, whether that’s the right time to invest new funds into the market or to sell out and withdraw. But the truth is, finding - and acting at - the exact right moment is almost impossible.
Using the Covid-19 crisis as an example; the ‘bottom’ of the market was in late March 2020. At that time, we had just entered lockdown in the UK with Europe having been under restrictions for just a few weeks prior. We had no true understanding of the Covid-19 virus, how long lockdowns would last or what the implications for businesses would be. Frankly, it would have taken nerves of steel to move significant cash into the market at that moment, even though hindsight tells us that it was the ‘right time’.
A common way that investors work around uncertainty over whether it’s the right time to invest is to spread the risk; phasing cash into the market over time rather than putting 100% to work on one day.
In practice, for many personal investors, this looks like a regular recurring investment, usually monthly. Investing regularly throughout a volatile period could allow you to benefit from pound-cost averaging (you may also see references to dollar-cost averaging) and could be a great tool when we don’t know what’s going to happen next.
By investing a fixed amount each month, say £1,000, you are naturally going to buy more units of a fund at times when the markets have fallen and fewer units when markets have risen. The result is that over time, you could have a lower average purchase cost.*
*It is worth noting that pound-cost averaging may not always work to your favour. In a consistently rising market you could have been better off investing 100% of the cash on Day 1. Pound-cost averaging tends to work best in more volatile periods, or when there is more uncertainty. However, investing regularly may give you peace of mind.
Volatile markets can provide opportunities for long term investors but they can also be unnerving to watch. Having a well thought-out plan and conducting thorough research are the foundations to keeping calm. At TILLIT, our experts share their insights and expertise, making it easy to make informed investment decisions.
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Date of publication: 21st December 2022
The information in this post is not financial advice, it is provided solely to help you make your own investment decisions. If you are unsure about whether an investment is appropriate for you, please seek professional financial advice. You can find more information here.
When you invest you should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return.