Words by Lauren Smith, an investment writer at leading wealth management company St. James’s Place.
War, inflation, geopolitical risk – 2022 has already had its fair share of global events. Russia’s invasion of Ukraine has caused a devastating humanitarian crisis. It has also disrupted the global financial system and surfaced longer-term questions about the nature and future of the global energy supply.
In addition to the conflict, inflation is rising fast, causing a cost-of-living crisis and sparking fears that a recession may be around the corner.
From an investment perspective, most should ignore the macro
Global events dominate the news headlines and can sometimes feel inescapable. As investors, they can have a major influence on our thinking and decision-making.
When we see shocking headlines, it’s extremely tempting to do something – like adjusting our investment portfolio to try and avoid the worst of the market volatility. Unfortunately, one adjustment does not guarantee you safety and security. For this to be a successful strategy, you need to have made the right adjustments, and keep being right as the market narrative evolves.
Accurately identifying which way markets will go, or predicting events such as the war in Ukraine, is highly complex and ultimately unlikely to pay off in the long run – no one has a crystal ball, or knows which big event is around the corner. Choosing your investments based on these forecasts is highly speculative and carries a great deal of risk.
Let’s look at the Covid-19 pandemic as an example. At the start of 2020, if we had been able to see into the future and look at the economic and market data for the year ahead, we would have most likely made a lot of unfavourable investment choices.
For most investors, there is no need to try and predict global events. In the long-run, markets have recovered from wars, recessions, and pandemics. There will always be these kinds of events, along with the market and headline reaction that follows – and the secret to successful investing is learning how to block out the noise and focus on your long-term aims.
The best way to navigate a volatile market
One thing you should always have in mind when it comes to investing is a long-term view. After all, you’ll probably be investing for decades rather than days. It’s about time in, rather than timing the market: investors are more likely to make consistent and substantial losses by reacting to the headlines.
There will always be world events that can result in losses, particularly for your riskier assets. The best course of action for most long-term investors is to be patient and stay put.
It’s important to note that your portfolio should always be in line with your risk appetite. You never want to be causing yourself unnecessary worry, which can make you more prone to adjust your portfolio in volatile environments. If you know what level of volatility to expect, and are prepared to handle it, you’ll find it easier to stick to your long-term plan.
How to implement a successful long-term strategy
A successful long-term strategy is all about choosing the right combination of asset classes. How equities, bonds, and alternatives (for example property) are blended is known as asset allocation, and it all depends on the level of return you’re seeking, as well as your risk appetite.
This strategy is successful in the long term because asset classes often perform differently depending on the current market climate. Over time they provide investors with diverse sources of return, helping to smooth out fluctuations in the market cycle.
Changing markets will affect different asset classes and companies in different ways. For example, if we look at the last five years, oil and gas companies have struggled. However, since the pandemic, they have rebounded, and have risen dramatically since the start of this year.
On the other hand, if we look at tech stocks, they have had an excellent few years but are now starting to struggle as the outlook for interest rates is changing. In between these two extremes are companies that tend to be resilient to changing market conditions. It’s good to have a mix of all three in your portfolio – a principle also known as diversification.
It is critical to diversify, and whilst it cannot eliminate risk, it should lead to reduced volatility and a smoother performance over any given period.
Your portfolios should be reviewed on a forward-looking five- to 10-year basis. During this time, it’s possible to position for the long-term trends that may affect different asset classes or sectors, and your investment needs over that time. Reactively swapping in or out of asset classes based on short-term market events can be very risky and very speculative.
It’s clear that global markets have had a bumpy start to the year, and the road ahead is uncertain. But for investors, the key principles of investing remain the same.
Looking past market volatility in a portfolio that’s suitable for your goals and risk appetite is the most sure-fire way of staying on track to achieve the returns you’re seeking.
Intermittently revisiting your asset allocation is important to ensure you are suitably positioned for what’s to come – but you resist the temptation to make any investment decisions on the basis of the rolling news cycle or next big event.
Disclaimer: Investing money carries risk, do so at your own risk and we advise people to never invest more money than they can afford to lose and to seek professional advice before doing so.
