Investing in a Volatile Market

26 October 2018

Investors who have money held with Life Assurance Companies in either a Pension or Investment Bond have experienced very attractive returns since early 2009 with relatively low levels of volatility.

They would have noticed dips in values at various times during this period but the majority of policy values recouped these falls quickly; however, volatility has increased over the past two weeks with world stocks markets showing significant falls and the outlook is for still more volatility going forward.

Volatility is a rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease. Higher volatility means the value of your investment can change dramatically, in either direction, over a short time period. Lower volatility means that the value of the funds should not fluctuate as dramatically.

During times of high volatility when savings values are falling quickly, investors can get spooked and begin to question their investment strategy. They may be tempted to pull out of the investment completely and wait until it seems safe to invest again; however, it is important to understand that market volatility is inevitable. It is the nature of investments to move up and down over the short-term and trying to time the market is extremely difficult, if not impossible.

When investing your money during times of heightened volatility you must be in a position to take a long term view with your savings. It is easier to ride the roller-coaster if you are investing in a pension as this is a very long term savings contract and you have many years to make up the times of poorer performance; however, you should carefully consider savings that may be required over a shorter timescale.

If you have a longer term outlook of between 5 to 7 years volatility should even itself out; however, if you have earmarked money for a specific short term purpose you should consider low risk investments or capital protected deposits, but remember, the lower the risk the lower the gains.

Diversification could be key to reducing risk by allocating investments among various asset classes which should react differently to the same volatility triggers; e.g. the ongoing Brexit negotiations or Global trade wars.

Investors wishing to invest a fixed amount each month on a long term basis will benefit greatly from heightened market volatility due to Euro Cost Averaging which works as follows:

When markets fall, your monthly contribution will buy more units with the same premium because units are cheaper and when markets rise, you will buy fewer units but all units already purchased will go up in value.

If you wish to review the risk exposure on any of your existing investments, or are interested in setting up a new regular savings policy or pension, now could be the perfect time. You should contact an impartial Qualified Financial Advisor today.

Robert Downes QFA RPA is a Qualified Financial Advisor. You can contact him through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on robert@jfl.ie

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