Market volatility could be an opportunity for smart investors
It’s common knowledge among successful investors that, if you’re likely to be buying investments over a long period of time, it’s going to work in your favour if the price sometimes goes down. Global stock markets have lost around 8 per cent since early July. Is now a good time for adventurous investors to put more money into the market?
Certainly, many equity markets look like good value. The FTSE 100 is trading on about 12 times next year’s projected earnings, with an average dividend yield 2 per cent higher than 10-year government bonds. Even if the UK market only treads water over the next year, a potential 4 per cent yield is pretty healthy compared to the 1 per cent or less earned from a cash account.
Given that the market has arguably now discounted a sustained period of sub-par global growth, it would not take much of an improvement in the economic backdrop to shift the balance towards higher share prices. This is particularly the case given that the major central banks seem to be pushing the first rate hike even further off into the distance.
Also, equity markets are currently moving into a more favourable season. Our research shows that, since the early 1970s, the UK market has risen in roughly eight years out of every 10 between early December and early May. That is not a fact to base an investment strategy on. But after a bumpy summer, seasonal trends are at least supportive for the coming months.
WHAT TO DO?
So how should investors respond to this outlook? Committing a lump sum investment is emotionally difficult. Our research has shown that investing the maximum annual amount into your stocks and shares Isa through a balanced mix of UK equities and bonds at the start of each tax year would have produced a portfolio of about 6 per cent more over the last 10 years than investing the same amount at the end of each tax year. Adding a regular monthly amount produced almost the same result as a lump sum at the start of a year.
IT’S NOT ABOUT TIMING
More importantly, rather than trying to find the best time to put money in the market, having a clear goal for your savings keeps you focused on what you are trying to achieve. Our research shows that people do better when they have distinct goals for their savings – a dream holiday, retirement, kids’ university funds – rather than just “savings”. And the risk someone is prepared to take is quite different for each pot. For instance, you are likely to take a lot less risk when building up a deposit for a house than when saving for a dream holiday.
Attaching a clear purpose helps you stick to the plan for each goal. And investing over the long term, with a well-diversified portfolio, helps your money ride out the ups and downs of financial markets. Each goal deserves its own distinct portfolio, rather than just a fund from a broker’s “best buy” list.