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Every investor aims for their investments to appreciate over time. However, there are instances when the value of an investment can fall, stagnate, or fluctuate significantly. When investments experience rapid changes in value, we refer to this as market volatility. But what causes this volatility?
Is It Normal for My Portfolio to Decline in Value?
Yes, market volatility is a normal aspect of financial markets. Numerous factors can influence the prices of stocks and bonds, such as earnings reports, central bank interest rate decisions, elections, geopolitical events, and natural disasters. Recently, concerns about the impact of the COVID-19 pandemic on the global economy have also contributed to market volatility.
While short-term fluctuations might cause concern, historical data indicates that investments are likely to rise over the long term. For instance, Nutmeg’s Chief Investment Officer, James McManus, pointed out that the FTSE 100 often experiences drops of at least 5% within a year while still finishing higher overall.
Should I Be Concerned About Market Crises?
The term “crisis” is frequently used in media reporting; however, not all volatile periods result in severe and lasting impacts on investments. While significant market crises do occur, they are relatively common. Our analysis identified 13 major market crises since 1990, averaging one every two and a half years. Investors can navigate multiple crises and still achieve favorable long-term returns.
How Should I Respond to Market Volatility?
It’s natural to feel uneasy about volatility and to seek protective measures. However, unless your investment goals have shifted, the best course of action often is to remain patient and do nothing. Data shows that most Nutmeg investors tend to stick to their original investment strategies during turbulent times. In fact, 97.8% of Nutmeg customers chose not to change their behavior in response to past market fluctuations.
What Measures Does Nutmeg Take to Manage Market Volatility?
The Nutmeg investment team is tasked with managing your investments and pays close attention during volatile periods. However, they refrain from making impulsive changes based on short-term fluctuations, recognizing that volatility is a natural part of the investing process.
The investment team operates with a longer-term perspective, focusing on the next six to twelve months, while avoiding distractions from immediate market noise. They prioritize reviewing the underlying investment thesis rather than attempting to eliminate volatility.
Can I Invest in Non-Volatile Assets?
While it is possible to invest in lower-risk assets, this strategy may not provide the returns needed to meet your investment objectives. Keeping your money solely in cash savings accounts can erode your purchasing power over time due to inflation.
Experiencing dips in investment value is unpleasant, but diversified investing is about spreading your capital across different markets and asset classes to achieve favorable returns. Remember the rule of thumb: no risk, no reward.
Is Timing the Market a Solution to Mitigate Losses?
Many would like to sell shares before market declines and repurchase them afterward. However, trying to predict market movements can lead to missed opportunities and potentially poorer outcomes than remaining invested. Research indicates that those who frequently enter and exit the market often miss out on positive returns. For example, from January 2000 to December 2021, the UK stock market returned an average of 4.6% annually, excluding fees. However, missing the ten best days during that period would have reduced returns to just 1.5%.
What Can We Expect in 2022?
So far, 2022 has been a turbulent year for risk assets, with equity markets reacting to rising interest rates and a gradual reduction of central bank support, particularly concerning government bond purchases by institutions like the Bank of England and the Federal Reserve.
Additionally, geopolitical tensions, such as Russia’s actions in Ukraine, have heightened investor anxiety, especially regarding energy markets. Volatility is likely when investors rapidly reevaluate their positions, particularly affecting the more speculative and exuberant parts of the financial markets. While this environment may create discomfort in the short term, it can also reveal opportunities alongside risks.
Any Further Questions About Market Volatility?
This guide aims to clarify market volatility and contains links to additional insights from our investment team. We commit to updating this resource whenever new information arises.
We hope these resources have addressed your inquiries. If you have further questions, please don’t hesitate to reach out to our customer service team.
Risk Warning
As with all investments, your capital is at risk. The value of your Nutmeg portfolio may fluctuate, and you could receive less than your initial investment. Past performance and forecasts are not reliable indicators of future outcomes.
Let me know if you need further adjustments or additional information!