Keep calm and carry on investing

2022 has been a tough time to be invested and it has been a very difficult period in which to produce positive returns for investors. Unfortunately, these falls are an inevitable part of investing.

Things are challenging, with rising inflation and the outbreak of war continuing to hang heavily over global growth. At the start of the year, I said we’d do well to get mid-single digit returns in 2022 - many would snap your hand off for that right now. Every asset class has fallen for the first time since 1990*; there has been nowhere to hide.

Bonds are starting to look interesting again

Not only have equity markets struggled but bonds have done badly as well. The good news is that a lot of bad news has now been priced in. Overall, equities are now looking a lot cheaper than they were. And, for the first time in a long time, government bonds are looking more interesting again, while corporate bonds are not far off considering too. Fixed income is finally providing an income and small amounts of UK and US government bonds have been added to the VT Chelsea Managed Fund range

The key issue we now face is the disconnect between inflation and interest rates. Transitory inflation is a term consigned to the past, as we now have broad inflation across many areas - not just food and oil. Central banks, initially slow to react, are now raising interest rates in
response. This creates quite the conundrum, as hiking interest rates too far risks triggering a recession, while not tightening enough risks causing further inflation spikes.

Focus on the long-term

My current message for investors is to remind yourself about why you invest and focus on the bigger, long-term picture. Resist the temptation to make short-term, knee-jerk reactions. At this stage of the cycle, the money is made by keeping your head when others are losing theirs.

The vast majority of listed companies continue to generate profits every day. Areas with long-term tailwinds like infrastructure, India, emerging markets and healthcare still present significant opportunities to invest in global megatrends. It’s also easy to forget just how much markets have gone up in the past ten years. Markets may have further to fall but we know they will recover in time. While savings rates have risen a little, do you want to sit in cash now with inflation close to double digits?

No doubt these are challenging times – but challenges always bring opportunities for those who are patient enough to wait for them.

Four ways to invest in falling markets

It's never nice to see your investments fall in value, but it is a normal occurrence in the market cycle. It is very rare for markets to move in a straight line – bull markets will have corrections and bear markets will have rallies.

But rather than trying to second guess the direction of investments, there are different strategies you can use to mitigate, or even take advantage of, market volatility.

1. Diversify your portfolio

At the risk of sounding like a broken record, diversification is key. If everything in your portfolio is rallying at once, this could be a warning sign that your capital is at greater risk to a change in market direction. With smart asset allocation, you can put your portfolio in a good position to potentially fall less than the wider market. You can dovetail your equity exposure with other asset classes such as bonds, property, gold, absolute return funds (which aim to provide positive returns in all market conditions) and even cash.

2. Buy on the dips

At the opposite end of the spectrum, those who have a stronger stomach for risk may wish to take the opportunity to snap up bargains during market corrections. Volatility isn’t necessarily a bad thing and there are sometimes opportunities in turbulent times. Protecting your portfolio should absolutely be your first priority but, if you buy something that’s cheap, you’ve got a better chance of making money in the long run.

3. Investing all year round

Most of us invest in lump sums, whether it’s a few thousand hurriedly put into an ISA before the end of the tax year or an annual bonus or similar payment. Another approach, however, is to invest smaller amounts regularly – say once a month when you get paid. One of the benefits of this approach is that it helps you stay focused on your long-term goals, as instead of seeing the value of your portfolio change dramatically (which can happen when you put in a lump sum), it ideally grows steadily over time.

4. Keep calm and carry on investing

Regardless of which investment style you prefer, it is fundamental to look through any short-term market noise. Time in the market is always a better option than timing the market (nobody has a crystal ball).

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.

Published on 10/10/2022