Watching the markets you are invested in fluctuate can be unnerving for many investors and it could even make you feel tempted to withdraw or sell investments.
However, while this may temporarily calm your nerves, the long-term financial impact could be potentially significant.
Here are our tips to help you stay calm when investing.
Sticking to your strategy.
If you are investing, there’s a chance you have a financial goal in mind. Whether that’s for a one-off purchase, to grow your wealth, or a longer term objective such as retirement, it can hopefully serve as a roadmap for financial stability.
When it comes to market volatility, holding your nerve can be difficult but it is important to remember that short-term volatility should not dictate your emotions as an investor. Time in the market can often smooth out any volatile dips in your investments.
Market volatility can test the resolve of any investor and if you keep focused on the long term rather than every moment of market swing or daily share price update, this could help to make decisions with a clear head on what to do next.
It can be useful to stick to a strategy that is in line with your objectives, time horizon and level of risk you are happy with.
Your time horizon involves the expected number of years you are considering investing to achieve a particular financial goal.
A longer-term goal such as retirement may be around 25-30 years away, so as the time horizon here could be considered fairly long, you may be willing to take on additional risk in pursuit of potential long-term growth. This is taking into account the assumption that you’ll usually have time to regain lost ground in the event of any short-term market decline.
Investing in a tax wrapper.
You can invest money into a tax-efficient account such as a Stocks & Shares ISA – and you won’t pay Income Tax or Capital Gains Tax on the money inside your ISA, no matter how much it grows.
The ISA allowance for the 2024/25 tax year is £20,000. You can split the allowance across accounts, such as cash and stocks and shares ISAs, however you can only contribute to one ISA of each type per tax year.
Additionally, you can also pay £4,000 into your Lifetime ISA in a tax year until you’re 50, separate from the tax-free ISA allowance. However, you must make your first payment into your Lifetime ISA before you’re 40.
Remember, there is no tax relief on ISA contributions and if you don’t use your annual allowance, you will also lose it, as this cannot be carried over into the next tax year.
One option to boost your retirement savings is by paying into a pension. Your pension contribution limit depends on your income, for example, this current tax year the tax-free annual limit is 100% of your salary or £60,000 (whichever is lower). This does, however, include both contributions paid by you and contributions paid by your employer. Any contributions beyond these limits are subject to income tax at your marginal rate.
If you earn less than £3,600 a year, you won’t pay tax on pension savings up to £2,880. Also, if you’re a high earner with an income above £200,000 a year, your annual allowance may gradually reduce to £10,000 in the current tax year due to what is known as the ‘Tapered Annual Allowance’.
It’s important to note tax is subject to an individual’s personal circumstances and tax rules can change at any time. Remember, pensions have access restrictions – you can’t currently access your pension until you’re at least 55 (this is set to rise to 57 in April 2028). However, you will typically benefit from tax relief of at least 20%, depending on your personal tax band.
Cut out any market noise.
History has shown that markets often typically recover from downturns and go on to deliver returns over the long term.
While it can be unsettling to see an initial dip and sharp movement, realising that volatility is a normal part of investing can put investors’ minds at ease when the natural reaction is to panic.
This century we’ve experienced events ranging from the global financial crisis to the Covid-19 Pandemic and more recently, the invasion of Ukraine.
During the initial Covid-19 period, share prices around the world fell dramatically as nations entered lockdown. The FTSE 100 crashed by over 34% in the first few months of 2020, its lowest level since October 2011. If you had taken action as a result, you may well have reduced your exposure to equities.
However, you’d then have missed out on the opportunity for the value of your assets to bounce back. The index had risen to its pre-lockdown peak by the end of 2021 before going on to hit a series of record highs in February 2023, and again, closed at a record high of 8,445 on 15th May, 2024.
Therefore, on this occasion, drowning out the “market noise” and sticking to your long-term plan would likely have been the best course of action.
Stay diversified.
Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. While this is designed to lower a portfolio’s overall risk against market volatility – it can’t be guaranteed.
Diversification works by giving you a wide range of exposure to parts of the market that may be performing better than others. This can help to limit losses in your portfolio – however, your capital is at risk and investments may go down as well as up
It’s important to remember that good performance is never guaranteed. Investing typically involves more risk than saving, as your money is exposed to the volatility of the markets you invest in. It could help to consider your attitude to risk and reward as this will allow you to measure how much investment risk you are willing to take.
While there can be potential for greater returns you could also get back less money than you put in.
Remember that investing can offer potential growth.
Cash savings accounts typically struggle to keep pace with inflation. This can result in savers losing value in ‘real’ terms and risk falling short of their savings goals.
Cash is also a fluctuating asset – as witnessed in currency markets, and changing inflation rates. If suitable for your goal, you could consider investing into a diversified Portfolio in a long-term investment, giving you the opportunity to potentially grow your money beyond the rate of inflation over a longer-term period of five years or more.
You must remember when it comes to investing your capital is at risk and as investments can fluctuate in value, you may get back less than you invest.
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With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.
Tax is subject to an individual’s personal circumstances and tax rules can change at any time.
ISA eligibility and tax rules apply. You should ensure your contribution does not result in your total ISA contribution within the tax year exceeding £20,000.
Pension eligibility and tax rules apply. You should ensure your contribution does not result in your total Pension contribution within the tax year exceeding £60,000 or 100% of your earnings, whichever is lower.
True Potential Wealth Management is authorised and regulated by the Financial Conduct Authority. FRN 529810. Registered in England and Wales as a Limited Liability Partnership No. OC356611.
True Potential Investments LLP is authorised and regulated by the Financial Conduct Authority. FRN 527444. Registered in England and Wales as a Limited Liability Partnership No. OC356027.
True Potential LLP is registered in England and Wales as a Limited Liability Partnership No. OC380771.
