It’s important to stick to your strategy and keep moving ahead consistently by spreading risk and growing your wealth for the long term.
Higher inflation and faster interest rate rises
At the time of writing this article in February, markets had reacted to the signs of faster wage growth and a strengthening US economy that may lead to higher inflation and faster interest rate rises. The global sell-off began following a solid US jobs report that fuelled expectations that the Federal Reserve would need to raise interest rates faster than expected because of the strength of the economy. That concern prompted the pullback from stocks.
The Bank of England seemed to offer support for the view that rates in general are on an upward path with a strengthening UK economy, meaning interest rates are likely to rise sooner than the markets were expecting.
More attractive investment alternatives
A government budget proposal announced by US lawmakers to raise spending caps could also fan inflationary pressures. Rising US bond yields are another possible signal of higher rates to come, which could impact on corporate profits and curb economic activity. But at the same time, higher interest rates can make investment alternatives to stocks, such as bonds, more attractive.
In practice, everyone’s investment goals are different. By deciding on your long-term financial priorities – whether it’s funding your children’s education or saving enough to be able to retire early – you can avoid being blown off course by short-term events.
Investors should focus on long-term horizons
Trying to second-guess the impact of events such as Brexit or the recent stock market correction – or even attempting to make a bet on them – rarely pays off. Instead, investors who focus on long-term horizons – at least five to ten years –have historically fared much better.
Sensible diversification – owning a mix of assets, including shares, bonds and alternative investment such as property – can help protect investors over the long term. When one area of a portfolio underperforms, another part should provide important protection – and it’s never too early or too late to start taking this considered and strategic approach.
Volatility, risk and market declines are a normal part of the investing cycle, but the media likes drama. Reports will use words that make these market fluctuations sound alarming, so be cautious about reacting to the unnerving 24/7 news cycle.
If you have a well-diversified portfolio, then it’s more important than ever to stay the course. You have a strategy in place that reflects your risk tolerance and timeline, so stay committed. However, if you reacted and sold in a previous market decline or have not implemented a strategic asset allocation, then now is the time to have a discussion about your investment options.
Be aware of the psychological affect this type of volatility has on you as an investor and resist the urge to be reactive. The recent decline was expected and is coming after financial markets as a whole have experienced a historic bull phase for close to ten years now.
No one knows how severe any market turbulence will be or what the market will do next. It could be over quickly or linger for a while. But no matter what lies ahead, proper diversification and perseverance over the long-term are what’s most important.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN.
YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.