It’s the nature of long-term investing that ups and downs are likely to come and go. It may be quite unsettling to see but try to keep calm and think long term rather than making any sudden reactions. For example, think about what you’re saving for and how uncertain periods like the cost of living crisis will pass.
In this article, we break down what market volatility is and share some tips for keeping calm so that you can get through tough economic times. The information in this article is intended to help you make informed decisions about your investments – but should not be taken as financial advice. The best course of action for you will depend on your individual circumstances.
What is market volatility?
It’s an inherent part of investing that the value of a portfolio can go up and down in value. They can do this every day, even during periods of economic stability. However, big changes can happen during times of market volatility as investment markets can be affected by a number of factors such as:
Any one of these events can cause market values to move up and down more dramatically than you may expect in normal times. When market values fall in value, it can cause a change of behaviour in some investors, as they’re worried about the decline in the value of their investments. But if lots of investors decide to sell their shares at the same time – this can cause sharp drops in share prices and the value of investments.
If you’ve seen the value of your investment portfolio fall in value due to recent events, it can be unsettling. However, it’s important not to lose sight of the big picture. Our article How market volatility can impact your pension covers this topic in more detail.
A general principle for long-term investors is to remember not to panic. Our research found that the younger an investor is, the more likely they are to sell during a financial crisis. We found that 10% of people aged between 25 to 34 said they sold all or at least some of their investments the last time there was a sudden dip in the stock market.1 Only 3% of people aged 55 and older said they did the same.1 The younger you are, the more time you have to make any ‘losses’ back – which is why starting to save early is so important.
When you’re a long-term investor, keep in mind that stock markets – and therefore the value of investments – don’t move in a straight line. Although the value of investments go up and down, they’ve historically gone up in value over the long term. You can see this if you look at a chart of a stock market index over a long period of time.2 The peaks and troughs across the graph represents the volatility – demonstrating how the value of a market and the investments within it can rise and fall daily, weekly or monthly.
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. Instead of focusing on what you can’t control – focus on what you can.
One thing you might want to focus on is improving your financial wellbeing. In our financial wellbeing index, we mention that a combination of ten money and mindset building blocks can help build financial wellbeing. Under the mindset building blocks, are ‘written plans’ and ‘long-term perspective’.2
To help you think about your future and take control of your finances, writing down a financial plan can help you clearly define your goals and map out how you’ll achieve them. If you see your investments fluctuate, revisit your plan to check in on your other sources of investments. It could help you identify if you need to make any changes to help you stay on track. It’s also important to take the ‘long-term perspective’ here to avoid making any rash decisions. You might wish to add a reminder on your plan that changes 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 How to create a retirement plan guides you through this.
Make informed decisions
Our mind can work against us in times of market volatility. We’re often influenced by recent events and this means we typically look at what’s happening in the here and now rather than thinking about the future.3 It’s also human nature to be negative about our long-term prospects when experiencing a period of instability.
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 perspective.
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 if you would need to re-enter the market. When the market recovers, this isn’t marked by an ‘all clear’ sign – meaning there is 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 the eventual recovery. Recovery has historically followed – but remember past performance isn’t a reliable indicator of what will happen in the future.2
Get information and financial advice
There is a lot of good, helpful information available to help you. MoneyHelper gives free and impartial guidance to help make your money and pension choices clearer.
Before making any big financial decisions, we recommend speaking with a financial adviser, who deal with financial markets on a daily basis. They can offer personalised advice based on your individual circumstances and help manage your investments closely, providing reassurance when needed. You can find a financial adviser through MoneyHelper. There's likely to be a charge for financial advice.
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.