Feeling the stock market jitters? Five ways to protect your wealth
The sight of stock markets falling can fill even the most experienced investor with the jitters.
While we appreciate that ups and downs are par for the course when investing in stocks and shares, seeing your hard-earned savings lose value is rarely a comfortable feeling.
Global markets have had a rough ride during the first half of 2022.
Surging inflation, rising interest rates, and the growing prospect of recession is creating significant uncertainty.
The rocketing cost of food, energy and oil as a result of the ongoing Russia-Ukraine crisis continues to pose a major threat to global economies, and most notably, your finances.
What’s been going on in the stock market?
On these shores, though the FTSE100 is only marginally lower than where it started the year, the trajectory has been far from smooth.
The gap between its highest and lowest point is 10%, including an 8% drop in the first few weeks of June alone.
In the US, the situation has been even rockier. The country’s main market, the S&P 500, tumbled almost 18% over a six month period earlier this year, tripping into bear market territory at the end of May. A bear market occurs when a market falls 20% below its most recent high.
It would be remiss not to briefly mention Bitcoin, whose investors have felt it harder than most.
The value of the cryptocurrency halved between March and June, and is some 70% lower than its all-time high.
How to protect your wealth
The recent stock market wobbles may have left you feeling nervous, and understandably so. You may be wondering what it might mean for your future financial goals.
At times like these, regardless of whether you’re saving for the future or using your investments for income, it can be an opportune moment to take stock of where you are.
To help steer your finances through this difficult time, here we offer five ways to protect your wealth when stock markets are turbulent.
Try not to panic
We appreciate this is easier said than done - the temptation to tinker with your investments when things are gloomy can be hard to resist.
However, it can be helpful to remind yourself that investing is a long-term pursuit, and bumps in the road go with the territory.
While this year has been tough for markets and ultimately your investments, six months is still a relatively short period.
Many of you will have years, perhaps even decades, before you need to use the money. Therefore, in most cases, doing nothing and waiting for the storms the pass is likely to be your best option.
Diversify your portfolio
You will likely be familiar with the phrase ‘don’t put all your eggs in one basket’, and this is particularly pertinent when investing for your future.
By spreading your money across a mixture of assets - such as stocks and shares, bonds, and cash, and even commodities such as gold – you can reduce the overall risk of your investments.
How much you allocate to each asset will depend on how much risk you are prepared to take. For instance, by investing more in stocks and shares and less in cash and bonds, your money will be more exposed to sharp rises and falls.
And don’t forget to set aside a sufficient emergency fund that you can dip into should you need money for any reason.
An amount equal to six months’ expenditure in any easy-access cash account is a useful rule of thumb. However, it might be worth keeping either more or less depending on any short-term needs you may have.
Consider drip-feeding investments
In an ideal world, stock markets would move steadily upwards. But as these recent movements have shown, they behave far more unpredictably.
If you’re concerned that markets will continue falling for the rest of 2022, and are therefore nervous about investing a lump sum now, then drip-feeding investments into the market can offer a solution.
Otherwise known as pound cost averaging, the idea here is that by investing smaller amounts regularly, you can offer some protection against future market falls.
Instead of investing all your cash at a single point, you can buy into the market at various points over, say, a 10-month period.
There is, however, a notable risk to this approach. If markets suddenly rise, then less of your money will benefit from the upswing.
Beware pound cost ravaging
Those of you currently drawing income from your investments may be the most concerned right now.
While investing regularly in falling markets has its advantages, withdrawing money in the same scenario can be harmful.
A major risk here is called pound cost ravaging, and is particularly relevant for those in the early stages of drawing income from your pensions.
Withdrawing money from your retirement fund when markets are tumbling faces a double-whammy: not only will have to sell more shares to take out the sum you need, but you’re also hampering your portfolio’s ability to recover once conditions improve. This can be particularly damaging when your pot still has many years, or perhaps even decades, to last.
For those of you in this situation, the beauty of income drawdown is that you can take money out as and when you choose. If your investments are performing particularly poorly, you may wish to consider stopping or adjusting withdrawals until things improve.
However, we appreciate that for some of you, if you’re not taking money out of your pension, you can’t pay your bills. If this applies to you, see below.
Seek advice
If you’re still unsure about which action to take, it is wise to seek professional advice.
An independent financial adviser can review your existing investment portfolio, and recommend a suitable strategy to ensure that your life goals remain on track.
At the very least, it may provide you with the peace of mind that your finances will be secure both now and in the future.
At Unbiased, we can connect you with the perfect financial adviser who can formulate a plan tailored to your specific circumstances.