Markets have been unsettled so far in 2022. We know that riding the ups and downs of the market can be uncomfortable, and that it’s hard to keep your cool as an investor when things are going against you. So, here’s our top 5 tips to help you make it through market downturns.
1. Understand that markets will fall
One of the most important lessons you can learn when you’re investing is that market declines are just as natural as market increases. If you understand this, then there’s no need to worry when the next drop inevitably happens. Plus, you’ll only take a loss if you sell your investments – which is why having a long-term mindset can make it easier to ride out any market declines.
Even though markets fall from time to time, remember that every drop to date has been matched by an even stronger recovery. And, while past performance isn’t a reliable indicator of future gains, the chart below shows some of the most significant market declines of the FTSE 100 between 1984 and 2021, along with the recovery.
2. Don’t try to predict the next decline
Many have tried and failed to predict what the stock market is going to do tomorrow, next week or a year from now. But to tell you the truth, absolutely no one knows what the markets are going to do in the future. Educated guesses are the best you can get – and even these are a gamble. 🎲
As a long-term investor, take it steady, invest in assets that match your risk appetite, stick to your plan and keep your goals in mind every step of the way.
3. Diversify your exposure
It may sound like a buzzword or jargon, but diversification is an important part of reducing the impact of market declines on your wider portfolio. The act of spreading your risk over a number of different asset classes, sectors or countries. means that you haven’t got all your eggs in one basket – so if one asset falls in price, it won’t cause your entire investment portfolio to fall with it. 🐣
As an example, if you had £1,000 to invest and you put it all into one company, it only takes that one company’s share price to drop for you to start losing money. But, if you spread the £1,000 across five different companies, the performance of one will have less of an effect on the performance of your investment portfolio overall. Plus, the gains on your other investments could help to offset a proportion of your losses.
An easy way to diversify yourself and get exposure to a group of different companies and other assets with a single investment is to invest in one of our three simple Starting Options- Cautious, Balanced, Adventurous. These have been created by external experts, and they automatically spread your money across different investment opportunities according to different risk profiles.
4. Don’t invest money you might need on short notice
While it’s good to invest your spare cash, you should make sure that the money you invest is money that you can do without in the short term. 💷 As we saw from the Covid-19 pandemic, the effects of market declines can be felt through the national economy – which resulted in pay cuts for furloughed workers and a wave of redundancies.
So, don’t invest cash that you need on short notice and make sure that you’ve got an emergency fund saved in an easily accessible account, like a current or savings account. This will mean that if your boiler breaks, you hopefully won’t need to sell up your investments to make ends meet. 🤝
5. Invest small amounts often
The problem with market downturns is that people tend to think that it’s better to stop investing until markets recover. That’s not necessarily true, because buying during a market downturn will mean that your money goes further – and you could end up with a larger investment position over time. 💰 This is why it’s a good idea to get into the habit of investing small amounts of money every week or month – known as pound cost averaging.
By doing this, you’ll capture the market average, because you’ll buy when markets are high, low, and everything in between, which helps to smooth out the effects of volatility on your investments. With Moneybox, you’ll be able to set up weekly deposits and monthly pay day boosts, as well as rounding up your everyday purchases to the nearest pound and investing the difference.
How to invest in a market downturn
While it might go against your intuition, investing during a market downturn isn’t something to fear. If you stick with investing small amounts often, you’ll limit your risk during a market downturn.
Plus, if you buy when markets are falling, you’ll reduce the average cost of your portfolio. And if you’re investing the same amount as when the markets were higher, you’ll increase your overall position size. Remember, there’s no need to worry that a drop in the market will trigger a more widespread market crash – these are few and far between.
Investing in funds is one way to help manage your exposure to risk – because the fund will spread your money across a range of different companies from a particular sector. But, before you invest in a fund, make sure to read its key investor information document to get a complete understanding about what the fund is attempting to achieve.