There’s usually a purpose behind financial investments. For many of us, building a nest egg feels like a natural thing to do, perhaps it’s performance, preserving your wealth for the next generation, or maybe you want your investments to reflect your values. What’s important is that you understand your situation and your financial goals.
Understandably investment volatility can make it easy to focus on the short term and those temporary peaks and troughs. Setting your specific investment goals is important to keep you focused when you need it and will enable you to build a portfolio to get you where you want to be. Investment strategies should include a combination of various investment and fund types in order to obtain a balanced approach to risk and return. Maintaining a balanced approach is usually key to the chances of achieving your investment goals while bearing in mind that at some point you will want access to your money.
Market volatility describes a situation when a market or security experiences periods of unpredictable, sometimes sharp price movements. This can be nerve-racking, even for the most seasoned investors. Many different factors can impact market volatility, sending values of investments in either direction. Some of the most common factors that determine the volatility of the market include investor concern, political events, natural disasters, and major events in foreign markets. But it’s important to keep matters in perspective. Avoid making rash decisions and focus on your long-term goals. Keep investing as you normally would. Also, don’t attempt to pick the market bottom or the turnaround to jump in. Fight the impulse to think you can.
Investments don’t always go in a straight line – they have the potential to react and recover from short-term market events. Rather than looking at short-term volatility, it pays to look at the bigger picture. Over the long term, investments will usually deliver returns that allow you to grow your wealth. Looking at a twelve-month snapshot of your investment portfolio may show that investments have underperformed but look back over the last five or ten years, and you’ll hopefully be on track.
One of the first steps in developing an investment strategy is to identify your risk appetite and tolerance for risk as an investor referred to as your ‘risk profile’. Every investor has a different risk appetite and risk tolerance with regard to their investment selections. Making investment decisions can depend on your personality as well as the goals you are investing towards. Weighing up the level of risk you’re willing to be exposed to can be challenging. Whether you’re reviewing your pension or building a personal investment portfolio, balancing risk is a crucial part of the process.
During volatile times, asset classes such as stocks tend to fluctuate more, while other assets such as bonds or cash tend to be more stable. By allocating your investments among these different asset classes, you can help smooth out the short-term ups and downs. Portfolio diversification may reduce the amount of volatility you experience by simultaneously spreading market risk across many different asset classes. By investing in several asset classes, you may improve your chances of participating in market gains and lessen the impact of poor‐performing asset categories on your overall portfolio returns.
Diversify, diversify, diversify – in other words, "don’t put all your eggs in one basket" – is sage investing advice. In addition to diversifying your portfolio by asset class, you should also diversify by sector, size (market cap), and style (for example, growth versus value). Why? Because different sectors, sizes, and styles take turns outperforming one another. By diversifying your holdings according to these parameters, you can smooth out short-term performance fluctuations and mitigate the impact of shifting economic conditions on your portfolio.
For more information or to discuss any of the issues raised in this article, please contact our dedicated financial planner, Marcus Pilkington, at Pareto Financial Planning.
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