As we’ve said, we can’t control markets. Anyone who says they can spot patterns or make predictions is a charlatan – don’t believe them. I’ve long since given up trying to guess what markets will do, even though my clients still ask me.
I have colleagues across the country who actually have crystal balls on their desks so they can gaze into them when a client asks about where the market is heading. Sarcastic, but it gets the point across. Guarding against market risk starts with acknowledgement. You can’t manage the market or predict it or time it perfectly, so you might as well not bother. So what can you do?
Lots of things, actually. If you’re worried about investing a lump sum in case it’s ‘the wrong time’ or ‘a bad time’ to do so, you can drip money into (or out of) the market over time, in so doing you will be averaging out the impact of your buy and sell trades. It’s a flip of a coin, really.
Either you’ll wish you’d invested all on day one, or you’ll be glad you didn’t. But you’ll feel like you’re doing something to mitigate the impact of fluctuating markets, so that might make you feel better, and that is often reason enough to do it.
You can diversify your investments into different asset classes and different geographies. This is classic eggs in multiple baskets. The point of diversification is to buy things which behave differently. You’re after negative correlation to some degree.
The thinking is that if one of your asset classes is suffering, another asset class somewhere else in your basket will be holding up OK. This has happened very clearly in the Coronavirus crisis – the UK stock market has behaved very differently to the US stock market for example. You’re investing in shares in companies in both markets, but the different geographies and the different kinds of companies in each means they have behaved differently.
You can also diversify the providers you use so as not to be too exposed to the failure of one provider. By provider I might mean platform provider or fund management house or whatever.
I don’t lose too much sleep over this because there are many protections in place for consumers, such as the Financial Services Compensation Scheme and the client money rules, which means that providers have to keep their customers’ money separate from their own.
When investing, you should rebalance regularly. This means resetting the mix of your investments back to what they need to be given your plans and timescales. This comes back to your planning assumptions.
It’s fairly easy to get information about how assets have performed in the past, and while every piece of investing literature carries the warning that the past is no guide to future performance, you make some intelligent assumptions based on the past.
You should never see your investments in the abstract though. Maybe you need to change the balance of your investments in light of changing circumstances rather than how they’ve done. That’s why it’s important to review things regularly. You can limit the damage potential of market risk by staying on top of your portfolio, by being intentional.
Leave a Reply