Foster Denovo|News & opinion|Preparing for volatility

Preparing for volatility

We appear to be coming to the end of a cycle in the markets. Having experienced a near ten-year bull run, volatility is widely predicted and a market correction may be on the horizon. The level of global economic expansion in this time has left equities, bonds and other asset classes heavily overpriced, returning poor yields. 

Compounding the concern is the newspaper headline favourite; Brexit. At this stage, we can only speculate on the outcome. What is probable, however, is that no matter the result, markets are likely to be affected.

Influences of global markets continue to heat up too: US inflation is rising above target and we’re witnessing an increasingly intense, potentially protracted, trade dispute with China.

The perfect storm

The bubble appears ready to burst. It’s a long-held belief that to truly comprehend volatility you need to experience it. Experienced investors who witnessed the 2008 financial crisis may be able to vouch for this. It is, however, easy to become complacent given the returns of the past ten years. Above all, being realistic and prepared for volatility is key; talk to your adviser and plan appropriately.

Investment scams are also becoming increasingly prevalent. During volatility, organisations are likely to prey on uncertainty, in the hope you make a rash, reactive decision. In 2017, during a prosperous year of investment growth, the FCA* reported 1.3 million claims of mis-sold pensions and investments. That’s 13% of all people who received regulated advice that year. At all costs, avoid becoming one of these statistics at a time when well-educated investment decisions can help mitigate market losses.

Is cash king?

The temptation is often to sell up and sit in cash but remember why you are investing in the first place. Often, it’s likely to be towards retirement, a long-term objective requiring long-term investment which may inevitably experience a correction or even recession. Recent analysis from AJ Bell** found investors are expecting returns of 4.8% a year to support their desired level of retirement income; a heavily cash biased portfolio for an extended period of time would not achieve this. Longer-term, the negative effects of inflation will erode buying power, even considering the recent Bank of England base rate increase to 0.75%.

Time in the market, opposed to attempting to time it, remains as relevant as ever. A mass sell-off only serves to lock in any loss and knowing when to time a sale and reinvestment is virtually impossible to predict.

A different cycle

The solution to these unfolding circumstances may be different to anything we’ve experienced previously. We appear to be nearing the end of a very different cycle; what has worked in the past won’t necessarily work now. Moving from bonds to equities, as was historically sensible in times of volatility, may be jumping out of the frying pan and into the fire. Prices are so overvalued they present wildly increased risk.

A new solution

It’s time for a different perspective. Alternative yields, rather than equities, are presenting exciting opportunities in an attempt to mitigate risk and minimise potential losses. Assessing your risk tolerance is a foundation of effective financial advice, enabling a carefully crafted asset allocation to spread risk and reduce exposure to overpriced assets.

Timely, expert financial advice is imperative during challenging market fluctuations. This cycle does appear to be different to anything we’ve seen previously; rebalancing your portfolio in preparation for, rather than reacting to it, is crucial. Above all, remember why you are investing in the first place and that markets do, historically, bounce back. Your adviser has the experience and expertise to help navigate your way to a secure financial future.
The value of your investment can go down as well as up and you may not get back the full amount invested. Past performance is not a reliable indicator of future performance.

Sources:
https://www.fca.org.uk/publication/research/financial-lives-survey-2017.pdf  October 2017
** https://www.ajbell.co.uk/news/pension-freedoms-three-years-new-analysis   27th March 2018

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