Riding the ups and downs of stock markets
Staying invested in stock markets is, we believe, the best way of growing your long-term savings pot.
Think autumn and you will invariably picture falling leaves, shorter days and, for some, involvement in the new school term. During different times of the year, it’s as if we expect certain months to conform to a pattern. In this sense, stock markets are no different. According to some historic sources, September has often been described as one of the poorest months for stock market returns.
Of course, what you may want to do, rather than second guess the seasonality of stock markets, is to remind yourself how to position your savings pots for the long term. In this sense, staying invested and riding the ups and downs of stock markets, in our view, is potentially far more beneficial than trying to fine-tune them.
So, here’s a quick reminder of why, we believe, staying invested over a five-year horizon – or longer – can be potentially advantageous:
Remind yourself of the reasons why you are investing
As a young investor who is just starting out, you may wish to consider increased risk and ride out share price fluctuations. After all, we are reminded on a regular basis, that with savings in the bank paying out so little interest, returns on company shares are potentially better than those of cash over the longer term.
If, by contrast, you are on the verge of retiring, fluctuations in share prices could have a more painful impact on your savings pot. As ever with investing, it makes sense to choose the level of risk you feel most comfortable with and adjust your time horizons accordingly.
Are you benefitting from compounding?
The total return you receive from investments isn’t all about price returns. In most instances, you receive an income from stocks in the case of dividends (essentially, a sum of money paid out of a company’s profits to its shareholders), or interest in the case of government bonds. (A government bond is effectively an IOU, whereby an investor lends to a government for a set time-period in return for a fixed rate of interest).
While the value of your investment may fall as well as rise, and you may not get back what you invested originally, re-investing income can help your investments grow over time through the power of compounding. Compounding, in simple terms, is receiving interest on your interest. You can read more about the effects of compounding here.
Are you diversifying enough?
In times of market stress, some investments such as company shares may perform poorly. By contrast, other investments such as government bonds, or gold, may lead to relatively better returns. Holding different types of investments, known as diversification, does not guarantee against loss in falling markets. But given certain types of investments often perform differently under different market conditions, this may help to reduce your overall risk. Take a look at our diversification blog here.
Are you seeing ‘down days’ as a threat or an opportunity?
Experiencing falling stock markets can be scary. After all, you’re seeing your hard-earned savings decrease in value. But hitting the panic button under these circumstances isn’t always the answer. Markets are often referred to as dynamic not static; hence we are constantly reminded that the price of our investments can go down as well as up. One thing they never do is go up in a straight line. But, we believe, if you can ride out the short-term discomfort of fluctuations in stock markets, the longer-term benefits of growing your savings pot should compensate for this.
 Source: Harriman’s Stock Market Almanac.
Remember the value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Recommended investment period: medium to long term, ideally five years or more.