If you’re a long-term investor, market ups and downs can be difficult to ignore – especially when you see the value of your investments fall.
The good news is that market volatility is a normal part of investing, and understanding why investment values go up and down can help you feel more prepared during uncertain times.
In this article, we look at what market volatility means, why keeping a long-term perspective matters, and how financial planning and regular investing (pound cost averaging) could help you stay focused on your investment goals.
The information is intended to help you make informed decisions about your investments – but shouldn’t be taken as financial advice. The best course of action for you will depend on your individual circumstances.
What is market volatility?
Market volatility describes how quickly and significantly investment prices go up and down over time. They can do this every day, even during periods of economic stability.
Some movement in the value of your investment portfolio is normal, even when the economy is relatively stable. But during periods of higher market volatility, prices can change more sharply or more often. This can happen for several reasons, including:
- Political and economic shocks
- Regional conflicts
- Environmental concerns
Events like these can create uncertainty and can cause market values to move up and down more dramatically than you might expect in normal times.
If some investors become concerned and decide to sell their shares, it can lead others to do the same. When lots of investors sell at once, share prices – and the value of investments – can then quickly go down.
If you’ve seen your investment portfolio go down in value, it can feel unsettling. But short-term market movements are only one part of the picture, particularly if you’re investing towards longer-term goals.
Taking a step back and looking at the bigger picture could help you feel more prepared when markets are uncertain.
Think long-term
A general principle for long-term investors is to remember not to panic. Keep in mind that stock markets – and the value of investments – don’t move in a straight line.
Looking at a stock market index over several years can help put short-term market volatility into context. Peaks and troughs can show how investment values can go up and down from from day to day, week to week or month to month – even when the longer-term trend has been upwards.
It’s important to remember that past performance isn’t a reliable indicator of future performance.
Focus on what you can control
Simply put, you can’t control how a market behaves. But instead of focusing on what you can’t control, focus on what you can.
One thing you can focus on is your financial wellbeing. Our financial wellbeing guide explores 10 money and mindset building blocks that can help, including having a written plan and taking a long-term perspective. Writing down a financial plan is one way to turn that mindset into action. It can help you clearly define your goals and map out how you’ll work towards them.
If you see your investments go up and down, revisit your plan to check in on your other investments. It could help you identify if you need to make any changes to help you stay on track to your long-term goals.
You might wish to add a reminder on your plan that changes can and do happen. Your investments could go back up, or you might have some time for your investments to recover. If you need some help getting started with a written plan, our article on how to create a retirement plan guides you through this. Or, you could visit our Money:Mindshift hub for more articles, tools and resources on all things financial wellbeing.
Make informed decisions
Our minds can work against us in times of market volatility. We might be influenced by recent events and thinking about the here and now, rather than remembering to picture the future.
Knowing your common panic reactions – such as selling your investments – could help you stay calm and make better decisions. It’s about taking a step back and asking whether the market is acting rationally or irrationally from a long-term point of view.
Here are a couple of points to consider before you make any decisions:
- If you were to sell your long-term investments now, think about whether you’d need to reinvest later. When the market recovers, there's not usually an ‘all clear’ sign – meaning there’s no obvious time to reinvest.
- If you were to sell when the market is down, you could potentially suffer twice. First, you lock in your losses by selling, and second, you miss out on any eventual recovery.
Regular investing – pound cost averaging
During periods of market volatility, you might feel tempted to stop investing. But one option you could consider instead is regular investing, sometimes called 'pound cost averaging'.
Pound cost averaging is when you invest a fixed amount of money at regular intervals, rather than investing a lump sum all at once. This means you buy investments when share prices are both higher and lower, which could help smooth out some of the impact of market volatility over time.
Spreading your investments in this way could help average out the price you pay and make it easier to stay focused on your long-term investment goals. However, pound cost averaging doesn’t guarantee better returns or protect you from investment losses.
There are a few reasons why pound cost averaging could potentially be an option:
- If you're nervous about investing, this approach might help remove some of the emotional stress associated with trying to time your investment.
- Regular smaller investments could help avoid the risk of making a larger investment at the wrong time.
- Investing little and often may help you create good habits and develop a sense of discipline towards investing.
- Finally, if your financial situation changes, you might be able to easily modify the amount you invest regularly.
While pound cost averaging can potentially be a good investment strategy, it's important to remember that it doesn't necessarily guarantee better returns than lump sum investing.
Whether you choose to invest through regular contributions, a lump sum, or a combination of both, it's important to remain committed to your savings goals. And remember, the value of investments isn't guaranteed and may go down as well as up. You may get back less than you invest.
Get information and financial advice
If you’re unsure how market volatility could affect your investments, you may want to speak to a financial adviser. A financial adviser can consider your goals and financial circumstances before offering personalised advice. Remember that there’s likely to be a charge for this. If you don’t have a financial adviser, you can find one in your area by visiting MoneyHelper.
If market ups and downs are making you question what to do next, our Money:Mindshift podcast episode, 'How to beat the markets', explores why emotions can influence investment decisions – and how keeping a long-term perspective could help you navigate uncertain markets. You can listen now on Spotify or Apple Podcasts.
As we say, the best course of action will depend on your individual circumstances, but hopefully some of the information in this article will help to put your mind at ease.