How to navigate the stock market during these uncertain times

Whether you are a beginner investor or a seasoned veteran, swings in the stock market can be unnerving.

The discovery of the Omicron variant of coronavirus, which caused £72billion to be wiped off the value of stocks across the world in a single day, will be the first real test of resolve for many of Britain’s new investors, who put their first money into stocks and shares during lockdown.

Figures from Lloyds Bank show that one in ten of us started investing after the onset of the pandemic, with stocks and shares one of the most popular investments.

Manuel Pardavila-Gonzalez, managing director at Halifax Share Dealing, says that travel companies were one of the most sought-after sectors to invest in during lockdown, and these are the investments that have been hurt the most by fears around the Omicron variant.

David Semmens, chief investment officer at investment platform Wealthify, says that the market outlook is now uncertain, describing this as ‘one of the most uncomfortable elements to overcome if you are new to investing.

He says: ‘Unfortunately, given how new the Omicron variant is, there is very little known about its impact, both from a health perspective and economically.’

With even optimistic experts forecasting that it will be weeks before we know the extent to which Omicron will impact on society, investors are likely to have to live with market volatility for some time to come.

So, is it time to sell out and go for something safer? Or should you learn to hold your resolve?

Volatility is a fact of lifefor investors

The fact that investments can fall in value as well as rise should not come as a shock to investors, who must read a series of warnings before buying stocks and shares or investment funds for the first time.

However, even if you know intellectually that the value of your nest egg could go down, the reality can feel very different. Academics have identified a phenomenon known as ‘loss aversion bias’, which means we feel roughly twice as bad when we lose money as we feel good when we make an equivalent gain.

This can cause us to make mistakes, including selling investments at the wrong time because losing money is too painful, or opting for ‘safe’ savings accounts that mean we lose money to inflation over time.

So while you might feel like selling all of your investments right now, because seeing them lose value is painful, David Semmens, at Wealthify, says getting used to market volatility is one of the keys to investment success.

‘It’s important to realise that these fluctuations are going to occur throughout your investment journey. Market volatility is a common phenomenon, and regular, long-term investing is a good way to approach it.’

Looking at the way the stock market has behaved over time may help you to understand how volatility can affect share prices in the long and short term.

Investors who saw their shares fall in value when coronavirus initially hit the world in March 2020 recovered most of the value of their stocks relatively quickly.

Over the long term, too, despite the ups and downs of the stock market, research shows that equities beat cash.

The Barclays Equity Gilt Study has looked at stock market performance over the past 119 years, and shows that in 76% of five-year periods and 91% of 10-year periods, shares have outperformed cash.

Smoothing the ride

Investing during uncertain times can be very unnerving, but there are ways to make a bumpy ride smoother.

One thing you can do is to feed money into the stock market gradually, so that you are buying shares, or units in a fund, at the same time each month, whether the market is up or down.

Semmens suggests setting up a direct debit into your investment account so that you invest automatically. ‘This can help to iron out some of the bumps in the market. Some people call this “pound cost averaging” or “drip-feeding”,’ he explains.

‘Regularly investing small amounts over time means that sometimes you will buy low and sometimes you will buy high, removing any emotionally driven reactions to the markets and giving you a bit of protection in case the market drops shortly after you have invested.’

Minimising the risk

Another way to help ride out volatility is to make sure your portfolio of shares or funds is as diversified as possible. If you have only just started investing, you may find that you only have a few shares or funds, and they may be particularly weighted towards a particular geography or sector.

As we’ve seen with the falls in stock markets recently, some sectors and geographies are more affected than others at different times — at the moment, for example, travel stocks are doing particularly badly due to the implementation of travel restrictions all over the world. If you have a good spread of different sectors and industries in your investments, falls are likely to be less dramatic.

‘Make sure that all of your eggs aren’t in one basket. Spreading your investments into equities, bonds, cash etc, takes risk off the table,’ says Neil Bage, chief behavioural officer at Murphy Wealth.

‘If we find lower correlated assets to sit alongside our more risky assets, where some zig while others zag, we increase the chance over the long run of earning better returns.’

One way to ensure your portfolio is diversified is to buy funds that are designed to provide an ‘instant’ portfolio, where you can choose what level of risk you take. Funds such as the Vanguard LifeStrategy range, which allows you to choose what percentage of your investments is in shares and in (less volatile) bonds, is one low-cost way to do this.

Sustainable and similar is the BMO Sustainable Universal range, which allows you to choose from an Adventurous version through to a Balanced or Cautious version.

If you prefer to choose stocks or funds for yourself, be aware that DIY investment platforms will not tell you whether your portfolio is well diversified — you will need to work this out for yourself.

A financial adviser will be able to do this for you, for a fee, or you can use a so-called ‘robo adviser’ , such as Nutmeg or Wealthify to produce a portfolio that matches your risk tolerance, after you have taken a questionnaire.

Don’t sell on a whim

Finally, it’s tempting to sell up your investments when the markets are falling, particularly with worry about the Omicron variant. Remembering what happened at the beginning of the coronavirus crisis can be helpful here: shares recovering after a big fall.

Many experts are also more sanguine about how the stock market will take any extra bad news about Omicron. ‘Concerns over new variants are inevitable, but these won’t cause longer-term issues for markets. The world is far better at dealing with the virus than it was at the start of the pandemic, markets know this and are very unlikely to panic to the same degree they did in 2020,’ says Salim Jaffar, investment analyst at 7IM.

‘Companies have renewed confidence to invest for the future. We are now at the start of a sustained period of growth, fuelled by confidence and expansion across the global economy.’

With inflation high and interest rates remaining low, investing remains the only way that many of us can get any returns on our money.

So, although volatility such as we have seen in the past week or so is frightening, it usually pays to ride this particular rollercoaster.

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