Equity price volatility is likely to remain a feature of equity markets in the coming months as inflation remains high, households struggle financially, the war in Ukraine drags on and fears of a global recession grow.
For some investors, sudden drops in stock prices can be detrimental and lead to irrational behavior, such as selling long-term investments in a falling market.
Other investors, who have built their own investment portfolios from scratch through the use of tax-advantaged Isas and pensions, may suddenly feel isolated. They begin to wonder if their investments remain fit for purpose – and wonder if the allocation of their funds and stocks is still appropriate for the difficult times ahead.
Weatherproof: Here are a number of investment tools and rules of thumb investors can use to steer them through choppy stock markets
Yet help is at hand. There are a number of investment tools and rules of thumb that investors can use to steer them through choppy stock markets. By using these tools and rules now, investors can help preserve their long-term investment wealth.
1) Why it can help to be an impersonator
Most investment platforms offer model portfolios for clients who need a little inspiration or aren’t sure about designing a portfolio from scratch.
This is usually a list of around five to eight funds that, when purchased together, make for a well-balanced portfolio with the potential for good returns.
Platforms tend to offer one option for cautious investors, a second for investors happy to take on a little more risk, and a third for adventurous investors.
There are also model portfolios for income investors. These portfolios are freely available to anyone – not just platform customers – just search for them on the investment platform’s websites.
These model portfolios can be a great tool to check if yours is on the right track. You don’t have to follow a model portfolio exactly – instead, you can use it as a useful benchmark. Choose the portfolio that best matches your investment goals, then compare it to yours.
For example, if you are a conservative investor, but have a higher proportion of equities than the model portfolios for conservative investors, you may want to reduce your stock holdings and buy more bonds.
Or, if you’re an income investor and your dividends aren’t as generous as those offered by model income portfolios, you might want to examine where you’re going wrong.
Most investment portfolios will have seen their value fall in recent weeks. But if you compare the returns on your investments to those of a similar model portfolio, you should get a rough idea of whether yours is performing as well as you might hope – or needs some tweaking.
2) Try a comparison with an index
An investment portfolio can easily become distorted. You can start with a well-diversified portfolio, but since some investments perform better than others, it can become skewed.
To check if you are on the right track, you can compare your portfolio to an index that you are trying to beat.
For example, the MSCI World Index is made up of the largest companies in the developed world. US-listed companies currently make up 67% of the index, Japanese companies 6% and UK companies 4.5%.
You can compare yourself to these weights. So, for example, if you have a higher proportion of US companies or US funds in your portfolio, you may be more confident than others that the US market will outperform in the future.
But if your intention isn’t to bet big on the US market, you might want to sell some of your US funds or wait a while to buy more.
3) Use smart online pension calculators
Will your investments provide you with enough money to get you through retirement – or will you run out?
It’s a tough question to answer, but for retirement investing, there are helpful tools like online retirement calculators.
These ask you questions about how much you have saved and what you have invested in. They then calculate the level of retirement income this could produce – or how long your money is likely to last. To arrive at such numbers, they have to make assumptions, so the answers will be a bit rough and ready. But they will give you an idea of the direction in which you are heading.
You can find a number of online pension calculators from the government-funded Money & Pensions service. Visit the moneyhelper website. org.uk.
4) Does your platform give you a boost?
If you are a do-it-yourself investor, what you buy and sell is up to you. Even if you have lost your way and are taking a huge investment risk, your investment platform cannot warn you. They are not organized to give financial advice.
Yet some investment platforms are finding a way to walk the line between giving clients a nudge if they need it, without it counting as advice.
For example, wealth management platform Hargreaves Lansdown has nudged more than half a million clients in recent months to tell them their portfolios lacked diversification.
Of these, more than a third have changed their portfolio accordingly. So if you get an email from your platform warning you that your wallet needs a little TLC, pay attention.
Increasingly, the platforms also have tools that allow you to “x-ray” your portfolio, that is to say to see how you are invested by geographical area or by sector. All of these are useful to check if you are on the right track.
5) Check how much funds you have
There is no perfect number of funds you should hold at any given time on an investment platform. The key is to have enough so you don’t have all your eggs in one basket, but not so many that you lose track of what you have.
Rob Morgan, chief analyst at investment firm Charles Stanley, shares his rule of thumb.
He says: “Keep the number of participations reasonable – enough to diversify, not so much that you lose track. Ten to twenty funds should be enough for most people.
Remember, though, it’s about quality, not quantity.
Some funds are designed to give you everything you need, such as global tracker funds or mixed funds. If you own one, you may not feel like you need to diversify further.
6) Divide the portfolio into core… and satellite
A common investment pitfall is investing too much money in specialist investment funds which tend to be volatile. By specialist, I mean companies like biotech, technology, space exploration, or single country funds.
There’s nothing wrong with holding such funds, but you need to ensure that the broader investments – which tend to be less risky – occupy a larger place in your portfolio.
Morgan of Charles Stanley recommends categorizing your investments into “core” and “satellite” funds to ensure they are properly sized in your portfolio. He says: “Think about the composition of your portfolio, the central core should be traditional investments, the bedrock.
“Around this there should be satellites – funds that are more specialized in nature and personalize your portfolio.”
He adds: “It’s important not to let a single investment theme or sector dominate your portfolio, which is why specialist high-risk investments should be satellites rather than core holdings for the majority of investors.”
7) Breathe before you act
Currently, it’s easy to look at your rapidly losing portfolio and assume it’s not on track. But this is not necessarily the case.
Most assets are currently falling in value – stocks, bonds, cryptocurrency – with global stock markets down around 16% year-to-date.
So before you make any changes to your portfolio, pause and breathe. You may not be doing any worse than most other investors.
Gemma Boothroyd, analyst at investment platform Freetrade, says: “Market volatility is the perfect breeding ground for biting your nails and doubting your portfolio.
“But, remember, volatility is a function of stock markets and other financial markets. If your portfolio has been hit by asset declines this year, don’t take that as a sign that it’s not on track.
“Market volatility is how investors find opportunities and it’s the price you pay for the hope of long-term outperformance of stocks versus cash.”
She adds, “Being balanced when checking your portfolio will make all the difference to long-term results.
“It may sound fluffy, but if you check your investments in a state of worry, you’re going to take action – and it won’t necessarily be the right thing to do.”
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