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How to Make Sense of Market Volatility

by Ivy Heffernan
market volatility

As a rule, investments should be a form of passive income. In other words, they should earn you money over time, with little maintenance or ongoing legwork. We also believe that investments should be simple, and that they should pay dividends
when the time comes. However, markets can be unpredictable and volatile, which can lead to confusion, stress, and ultimately, hasty decisions that lose money. In today’s article, we’ll try and ease concerns around market volatility, showing you the benefits of thinking long-term instead of short-term, and why it’s best to be patient rather than make emotionally charged decisions.

Let’s start by covering one of the key rules for investing – putting time on your side.

Put time on your side.

Time is key when it comes to the stock market, and while investing can be extremely profitable, share prices can rise and fall and money can be lost, especially if you react to short-term fluctuations. On the flip side, losing out in the stock market is very rare when you use a long-term approach, which is why putting time on your side is so important. Any financial advisor or investor worth their salt will tell you to utilise at least a five or ten year strategy when it comes to holding shares. The simple reason is that the longer you wait, the higher the likelihood of you making money on your investments.

Use history to predict the future.

Speaking of time, history is a great way of supporting the idea that long-term investments are more beneficial than the short-term. To demonstrate this fact, we’ve examined the past 25 years of investments in the UK and international stock markets, looking at potential to make money over one year, five years, and ten years. The results speak for themselves, and compared to holding shares for a longer period, if you held in the UK for a one year period, you’d have lost money more than 20% of the time. Compare this to ten years, and that drops to 2%, and when you look at ten years from an international perspective, it’s a mere 4%.

Do nothing.

As we’ve discussed, stock markets can be volatile. It’s the nature of the beast. However, when this happens, you need to resist and think long-term, because in the stock market, it’s not all about timing, it’s about time. Anything from political uncertainty to the news can lead to market volatility and uncertainty, but it’s all part and parcel of the industry. That doesn’t make unexpected, dramatic drops any easier to stomach if you have skin in the game, but it’s important that you don’t change your long-term strategy or sell up earlier than you initially wanted to. This is because of the simple fact that short-term volatility is just that, short-term, and the market corrects itself over time, and it always has done.

The perils of “market timing”.

To those who don’t know, market timing is investing when the time seems right, i.e. putting money into stocks or shares when they’re at a low or the market seems calm. This sounds like common sense, but it’s actually very risky. The main reason being that dramatic drops and rises are generally clustered together over the same short period of time, and they often precede one another. To support our argument, we’ve analysed the UK market over the past 15 years, and looked at the average annual return over that timeframe for investors using the FTSE all-share index. We found that missing just the ten best days over this 15 year time period dramatically cuts your annual returns from 7.6% to 3.3%, and missing 20 days drops that figure down to 0.8%. This means that if you try and play the market sporadically and predict the best time to invest, there’s more risk of missing out on those large gains, which negatively affects the long-term return.

Key takeaways about stock market volatility and market timing.

Fluctuations happen, but it’s no reason to panic.
● Have a plan that spans at least five or ten years.
● The longer you hold steady, the more chance you have of making money.
● Market timing is complex, and you can’t rely on short-term falls or gains.
● Stay in for a longer period for more chance of high returns.

Get in touch.

We have years of experience when it comes to investments and the stock market, and our experts are here to help. Whether it’s riding the storm and holding out for longer periods of time, the best commodities to invest in, or how to create a winning investment strategy, we can provide expert guidance today. To find out more about the investment opportunities you can take advantage of, and the many ways you can benefit from the stock market, get in touch.

Alternatively, you can give us a call on +66 809 148 633 to speak to an expert.

– Scott Kingsley

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