Discussion of the proposed Cashback Investment Club
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Dear Cashback Investment Club,
The waiting is nearly over and the bell will soon toll for the Conservative Party. Deal or No Deal, referendum or election – it’s all up in the air and no one can say with any certainty how the markets will react.
During periods when uncertainty can be at the forefront of investors’ minds it can be useful to consider a few things.
At present, nothing has significantly changed. The countdown clock continues, and what the eventual outcome will be still remains unknown. The past year or so has shown anything is possible and we should always be prepared for the unexpected; taking nothing for granted.
No matter what the outcome, there will be winners and losers in terms of the markets. Market volatility is often seen by many as the enemy of private retail investors, yet if carefully considered; it’s possible to make it your friend.
Outlined below are some key considerations for investors, giving you the confidence boost needed to invest in such uncertain times or how to avoid an untimely exit.
Do not make irrational decisions
Firstly, as investors we need to take a step back and consider why we are investing. If the investment goal, and time frame associated with it, hasn’t changed and firmly remains in the future then it might be best to sit tight. It’s very easy to get swept along with a tide of emotion as markets react, but a cool and logical approach will serve you better. While selling may be the right course of action for some, for others holding off and taking stock could be more beneficial. It can be very painful looking at a sea of red figures within a portfolio, but unless you have to cash an investment in, remember it simply remains a paper loss and no loss or gain is realised until such time as encashment.
Be flexible and be wary
During volatile markets, it’s crucial for investors to identify and appreciate your tolerance to potential losses. Stop loss limits and buy limit orders could therefore be worth considering.
Stop loss limits are a wonderful tool in normal market conditions but investors should appreciate they also have the potential to be your worse enemy. In times of extreme market volatility they could be triggered at prices way below the level set, due to prices plummeting and subsequently falling through that level.
For those actively seeking to benefit from the volatility, a buy limit order may be worth considering. It could potentially allow you the flexibility to pick up an investment at a significantly reduced price, compared to normal market conditions.
Remember, on Friday 24th June 2016, the morning of the BREXIT result, the UK stock market was down around 8% - creating significant volatility, however by late afternoon the leading UK markets had started to stabilise and recovered ground to be only down around just over 3%.
Volatility creates buying opportunities
The Warren Buffet quote of ‘Be fearful when others are greedy and greedy when others are fearful’ is possibly opportune when markets are volatile. For many, the natural reaction is to sell, while for those with a keen eye and stomach for turbulence, volatility can create a buying opportunity.
Drip feed into the market
The ability to drip feed money into your investment ideas during volatile times is a perfect strategy to help navigate such conditions. Adopting a ‘little and often’ approach is an achievable strategy, and drip-feeding into an investment can help reduce exposure to volatility while also benefiting from the returns.
Risk vs Reward
Be realistic in your expectations. If you’re saving for a specific reason or event and need to achieve a certain level of capital, you need to consider the overall timeframe and approximate level of return required to achieve it. Does the investment being considered carry a higher degree of risk than you are comfortable with taking? If the answer to this is yes, then the investment is likely to be unsuitable and will make you feel uncomfortable; potentially causing sleepless nights and a vast amount of worry. Always ensure you are comfortable with the risk being taken and if needed, realign and appraise your objectives.
Remember, only buy what you know and understand.
Head of Investments and Product Proposition, The Share Centre
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