The snap decision by Prime Minister Theresa May to call a General Election on 8 June certainly caused movement in the currency market, but less so in the stock market. Andy Parsons, Head of Investments at The Share Centre, provides a checklist of things to consider during periods when uncertainty can be at the forefront of investors’ minds:
“Up until the morning of Tuesday 18 April, market attention had been primarily focussed around the French election as well as the early stages of BREXIT negotiations following the enactment of article 50. However, following the snap General Election announcement, the market appeared to react badly with the FTSE100 pulling back by some 2%. This was however, more to do with the strengthening of sterling which reacted very positively to the news.
“At present, nothing has significantly changed. The countdown clocks have been started, both in terms of the UK election and BREXIT, but what the outcomes will be, still remain unknown. The past year or so has shown anything is possible and whilst we don’t anticipate any significant volatility in the short term, it doesn’t hurt to be prepared for the unexpected and take nothing for granted.
“Whether it’s the UK election or the withdrawal from Europe, the result is a binary outcome, Conservative or Labour, hard or soft exit. Nevertheless, no matter what the outcomes, there will be winners and losers in terms of the markets.
“Market volatility is often seen by many as the enemy to private investors’ portfolios, yet if carefully considered; it’s possible to make it your friend. The five considerations outlined below could give investors the confidence boost they need to invest in such times as and when they occur:
- Do not make irrational decisions
“Firstly, investors need to take a step back and consider why they are investing. If the investment goal, and time frame associated with it, hasn’t changed and firmly remains in the future then my advice would be to sit tight. It is very easy to get swept along with a tide of emotion as markets react, but a cool and logical approach will serve you better. Whilst selling may be the right course of action for some, for others holding off and taking stock may be more beneficial. It can be very painful looking at a sea of red figures within a portfolio, but unless you have to cash an investment in, remember it simply remains a paper loss and no loss or gain is realised until such time as encashment.
- Volatility creates buying opportunities
“The Warren Buffet quote of ‘Be fearful when others are greedy and greedy when others are fearful’ is possibly opportune when markets are volatile. For many, the natural reaction is to sell, whilst for those with a keen eye and stomach for turbulence, volatility can create a buying opportunity.
- Drip feed into the market
“The ability to drip feed money into your investment ideas during volatile times is a perfect strategy to help navigate such conditions. Adopting a ‘little and often’ approach is a very achievable strategy, and drip-feeding into an investment can help reduce exposure to volatility whilst also benefiting from the returns.
- Risk vs Reward
“Be realistic in your expectations. If you are saving for a specific reason or event and need to achieve a certain level of capital, you need to consider the overall timeframe and approximate level of return required to achieve that. Does the investment being considered carry a higher degree of risk than you are comfortable with taking? If the answer to this is yes, then the investment is likely to be unsuitable and will likely make you feel uncomfortable, potentially causing sleepless nights and a vast amount of worry. Always ensure you are comfortable with the risk being taken and if needed, realign and appraise your objectives.
- Be flexible and be wary
“During volatile markets, it is crucial for investors to identify and appreciate their tolerance to potential losses. Stop loss limits and buy limit orders could therefore be worth considering.
Stop loss limits are a wonderful tool in normal market conditions but investors should appreciate they also have the potential to be your worse enemy. In times of extreme market volatility they could be triggered at prices way below the level set, due to prices plummeting and subsequently falling through that level.
“For those actively seeking to benefit from the volatility, a buy limit order may be worth considering. It may allow investors the potential flexibility to pick up an investment at a significantly reduced price, compared to normal market conditions.
“Remember, only buy what you know and understand.”