Sometimes the market doesn’t always behave the way we would like it too, and if market volatility has you concerned you are more than likely not alone – but should the ups and down over a short-term period be seen as an opportunity? Think through your decision rationally and make sure you consider your risk appetite, investment period and why you invested in the first place.
It’s fair to say that the financial market didn’t get off to a great start this year and despite the increase in the price of oil there have been other contributing factors that have caused the markets to fluctuate. With falling values in the Chinese Stock market, the Bank of Japan moved to a negative interest rate and of course the uncertainty surrounding the UK EU referendum, it’s no wonder that we have been experiencing a volatile market.
June saw a good run for the UK equities and the FTSE 100 rising by 3.4% by the end of the month. This rise continued for the UK market throughout July. Increases have been as of a result of many factors, one of them being the weakness of the Pound and the subsequent benefit to companies that earn revenues overseas (Schroders, July 2016).
What is a volatile market?
A volatile market can be defined as the tendency to rise or fall sharply within a short period of time – in other words it’s the ups and downs of the individual equities within the market. Volatility can be one of the main reasons why investors may sell at the wrong time and could often fail to benefit from any potential recovery over the longer term. Whilst it can be a natural instinct to want to sell in times of uncertainty to avoid the risk of further loss, don’t forget that as the market falls this reduces the cost of purchases you may make.
As highlighted by Schroders, one of the leading investment managers in Europe, market volatility can present opportunities for longer term investors, with the short-term investors being impacted the most. Since shorter term investors are more sensitive to potential losses created by volatility, those with a longer view and willing to withstand a short stormy period may take advantage during such times. By investing regularly, such as a monthly direct debit, volatility could provide an opportunity. Schroders have also indicated that beyond periods of 24 months the impacts of high market volatility tend to fade.
However, an approach to your child’s investment is ‘do not panic’ if the stock market falls. If you ride out the waves of a low market and invest more when the market is low, then you could benefit when the market rises. Another thing to bear in mind is that uncertainty in the market can give rise to volatility. The decision to leave the EU created other uncertainties, and these too could give rise to continued volatility in the short term, but consider the longer term view and weigh up your options. A hasty decision to exit into cash now will ensure that any losses your child has experienced will be realised.
Dealing with Volatility – the importance of diversification
Child Trust Funds (CTFs) and Junior ISAs held with The Children’s Mutual are invested in funds that aim to match the performance of a wide range of UK company shares, rather than just a few. The idea of diversification is that whilst one investment may be going through a bad time, others may not – and this diversification helps to smooth out the risk of volatility.
Also, under current Government guidelines, to help protect the value of the account, the CTF will have the option to gradually move into lower risk assets – government bonds and cash – for the final years of the investment period. This occurs so that as the child’s 18th birthday approaches the risk of the account losing value if share prices fall is reduced.
Investing for the long term
The Children’s Mutual is part of Foresters Financial, who look after the savings of over one million children, and if you have a long-term investment, such as a CTF or a Junior ISA it is more than likely you will notice both rises and fall in the value of your child’s account over the investment period; however the value of the account cannot be determined until the account reaches maturity, when your child is 18.
If you have a long-term investment is more than likely to increase over time if invested in stocks and shares compared to saving in cash. Whilst past performance is not a guarantee of future performance, the Barclays Equity Gilt Study 2016 shows that an investment over 18 years into equities such as stocks and shares, is likely to outperform cash 99% of the time (based on annualised real returns analysed since 1899). Over an investment period of 10 years the figure is 91% and over 5 years, it is 74% more likely to outperform cash.
So, what next?
As an investor before you make any decisions, consider the best options that will meet your original goals of investing. Be aware of risk during times of volatility, but don’t panic. Remember that an unsteady market may be a result of specific economic events, such as the EU referendum, and may not be for the long-term. But, bear in mind that past performance is not an indicator of future success. The value of your investment can fall as well as rise, and as with all stock market investments you may get back less than paid in.
Remember what you are saving for
One thing is for certain, a lump sum when your child reaches 18 can help them realise their choices and opportunities – whether that is helping them buy their first car, pay towards the cost of further education or possibly travel the world.