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How Market Volatility Can Trick You

 

Investments are subject to market volatility. Volatility is the degree to which the price of an asset goes up and down, fluctuating, over time. ”Riskier” investments tend to have a higher level of volatility. So, although there are higher potential gains the price can fluctuate more.

 

Investors with a short-term view can be tricked by sudden volatility into selling their investments at a low price. This results in solidifying their loss and prevents them from benefiting from market recovery.

 

Buy high, sell low?

 

We all know that the value of investments can fall as well as rise in value. This warning is written on all financial promotions. However, when we see a drop in the value of our investments it is natural to let emotions get the better of us. Making a quick and rash decision to sell holdings can be a costly mistake in the long-term.

 

You may be getting a bad deal as the sale price may now not reflect the real value of the investments held. Many investors panic selling together can make prices fall further. Investors are also subject to transaction costs or dealings fees. By selling at a low price it locks-in and crystallises any losses.

 

 

Markets are cyclical and tend to recover given enough time. If you sold at a low price, you are now holding cash. Then, as markets recover, and the value of investment prices rise, you are not getting the benefit of that recovery. When confidence in the market returns and you buy back again it is at a high price. Buying at a high price makes it more difficult to get a good return. Although irrational, many of us can be allured into buying high and selling low.

 

Academic studies such as one by an economist called YiLi Chien¹ has shown that between 2000 and 2012, a buy-and-hold strategy produced superior returns for the average US Mutual Fund. On average the investor made an annual return of 5.6%. This was 2% higher than the 3.6% returns of investors who try to chase returns by buying and selling.

 

Making impulsive buy and sell decisions means you can lose on the way down and the way up. Having a long-term view is of great importance for riding out market fluctuations and volatility. This is a key aspect of getting strong long-term investment performance.

 

At Tiller, we suggest investing for a minimum time-frame of three years but preferably five or longer… The longer your investment period the less chance that you will be affected by short-term drops in the market.

 

The importance of a diverse portfolio

 

Having a well-proportioned and diverse portfolio of investments is also essential for riding out market volatility. Diversifying a portfolio limits having too much risk in one area. When sudden negative market volatility occurs it usually affects one area of the market more than others. Also, different types of investments are usually affected in different ways. Stocks and shares might respond differently to market shocks than bonds or commodities. By spreading money across different areas, it limits the negative impact.

 

At Tiller, we diversify portfolios across a range of different sectors, types of assets and geographical areas. Then we continuously monitor the portfolio holdings to ensure that the money continues to be invested in the right place and in line with your risk level. If it drifts too far away from the target, we re-balance at no charge to you.

 

Time in the market, not timing the market

 

“Time in the market, not timing the market” is a common saying in the investment industry. Short-term market volatility is very difficult to predict. Even highly experienced investment professionals will not be able to perfectly choose when to buy and sell. “Timing the market” may not be the best strategy.

 

More “time in the market” will usually result in higher long-term gains than trying to predict where the peaks and troughs are. At Tiller, our strategy is to choose high-quality investments that will stand the test of time. Preferring to target long-term financial health over chasing unsustainable quick gains.

 

Why not see how see how “time in the market” could work on your investment portfolio? Our scenarios tool shows how key market events like the 2008 crash would impact a portfolio and the length of time it takes to recover. Explore here.

 

 

¹https://www.stlouisfed.org/on-the-economy/2014/april/chasing-returns-has-a-high-cost-for-investors

 

Disclaimer:
The views contained herein are not to be taken as a recommendation or advice. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. A mandatory sell of a theme may result in a taxable capital gain or loss. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on Tiller’s website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. It should be noted that investment involves risks, the value of investments may fluctuate in accordance with market conditions and investors may not get back the full amount invested.


Investments can go down in value as well as up so you could get back less than you invest. Your capital is at risk. Find out more

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