Investing tips to play it safe in volatile markets

By Mike Narouei, Content Producer at Boring Money

26 Mar, 2019

When markets wobble, you don't want to panic sell and do the wrong thing. But hiding under a bush isn't always the best option either. Cherry talks to some of the pros to get their tips.

When it comes to the stock market, you don’t get the highs without a few of the lows. Markets have been smoother this year, but the last three months of 2018 were a salutary reminder of just how seat-of-your-pants stock market investing can be.

During those volatile times, the temptation can be to hide under a bush somewhere until it’s all over, but that’s not a great strategy either. It’s really difficult to time when markets are going to recover (which, most of the time, they do) and you may miss the rally if you’re still cowering under that bush. So what should you do instead?

Here’s some food for thought when dealing with market volatility:

No sudden moves

Don’t go all in cash, or all into bonds, or indeed ‘all’ into anything. Any moves you make in response to changing market conditions should be gradual and well-considered. Think about where you want to get to in the longer term – a comfortable retirement, for example – and keep yourself and your investing strategy firmly focused on those goals.

Diversification

Look at how your portfolio is positioned and whether it is too focused on just a few areas or sectors. Gervais Williams, fund manager on the Diversified Income trust, says:

“There are certain sectors that are well represented in the FTSE 100 – banking, commodities, oil/energy, insurance – that tend to do well when markets rise and interest rates fall. If markets wobble, investors need to hold as wide a range of assets as possible, and adding some small or micro-cap stocks brings in broader exposure.”

The same might be true of holding a mix of equities and bonds, or even bringing in alternative areas such as property or private equity. Spreading your investment net widely is generally a good idea.

As good as gold?

Gold is often seen as the enduring bulwark against market volatility. Josh Saul, CEO of The Pure Gold Company said:

“Our clients are not necessarily purchasing physical gold for growth. It’s more about creating a hedge against the prospect of other assets falling in value, like property and equities, in the face of uncertainty.

“Some clients view physical gold as an alternative to keeping money in the bank. Bank savings expose investors to counter-party risk, while their savings grow at a lower rate than inflation, which essentially means that their cash is gradually worth less.”

However, the problem with gold is it doesn’t do much apart from protect against volatility. Others suggest that the US stock market has provided as good a hedge against market volatility as gold, and holds more potential upside. US companies tend to be better-run than their peers around the globe and return more profits to shareholders via dividends and share buybacks. This can make them resilient even in difficult times.

Don’t sell out at the bottom

Andrew Bell, chief executive officer at investment trust Witan, says: “Last year was pretty difficult for the trust, but we have made those losses back this year. At some point, we had to look at what we owned and ask ‘did we make a mistake on the markets?’ If we’d seen a good reason for the 12% drop in stock markets we would have adjusted, but we didn’t want to cut at the bottom. We took on more exposure to the stock market in December (via gearing) and have got the benefit back.”

The message? Avoid selling everything ‘at the bottom’ when shares prices have fallen, particularly if you can’t quite work out why markets are so troubled.

Keep an eye on valuations

There really is no better advice than to try and sell at the top and buy at the bottom, but it is fiendishly difficult to do in practice. However, it is important not to get swept along with the crowd, panicking that the end of the world is nigh when share prices are low, or believing that the party is going to last forever when share prices are rising.

Investing really is a long-term game and you need to be in it to win it. So sit tight and keep your eye on the prize.

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