Investment Essentials in a Volatile Market

9 Feb

I am a fee charging financial adviser (but the commission option is available) at Jewell & Petersen Ltd based in Cardiff, South Glamorgan. Follow me on Twitter and LinkedIn.

The financial markets have been a roller coaster ride for most of the recent trading sessions. The majority of this market performance experience has been towards the downside but with periods of market spikes.

Andrew Burton / Getty Images / AFP

There are two key elements to investing: The ability to review and assess risk and the ability to view the ever-changing situation with perspective.

The assessment requires reviewing the risk of your investment portfolio (volatility) and your tolerance for risk within the broader sense and your portfolio.

A simple test during times of extreme volatility is to pick a time period of a week, month or longer, calculate the change in value in the portfolio. Then, take some suitable market indices, for example, FTSE 100, CAC 40, DAX or FTSE Small Cap. Calculate the change in these benchmarks over the same time period.

A television journalist in Australia observes tumbling market data.

How did your portfolio compare to these indices? While hardly a perfect approach, it is a useful comparative tool. It will give you a sense of how your results compare to the indices chosen. Has your portfolio held up well compared to “the market”? And, have you lost more or less than you expected?

Personally, I track portfolios on a more formal basis using weighted benchmarks of various indices that are tied to the target allocation for each client.

The other points to consider are :- How does the performance of your holdings make you feel? Do you stay the course and perhaps rebalance your holdings in line with your investment plan/strategy? Or are you inclined to react to the market and sell on bad news? Or do you hang on in the hope that in time the situation will improve and you will, at least, recoup the losses sufered through the existing investments?

Perspective is vital. The market has, at times, both declined and rallied severely and swiftly. The FTSE 100 is up over 66% since March 2009 lows, down 3% in the last year, down almost 8% in the last 5 years, up almost 15% in the last 10 years. Effective professional management can and should improve these results.

How does the more recent market volatility impact your longer–term financial planning? Are you still on track toward your goals? Are you inclined to sell everything and go to the safety of cash? But what about the effect of inflation and the interest rates achievable? What did you do during the longer-term market declines of 2000-2002 and 2008-2009? Are you happy with the results of these actions?

With the ever-increasing media coverage of the world markets, as investors we must take a psychological step back and assess the situation in light of the facts and not the rhetoric. Remember, whether the news is good or bad, fall back on your financial plan, strategy and assumptions – assess and confirm their suitability. React only to factual data, as it is very easy to be swept up in the media’s focus on extreme events.

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