Navigating market fluctuations

Recent dips in the stock market, driven in part by fluctuations in the US market, have reminded investors of the ups and downs that come with investing. While market volatility can be uncomfortable in the short term, it’s important to understand how these changes might impact your finances and how to stay focused with a thoughtful, strategic approach.

Understanding the impact of market dips

Market dips are a natural part of the investment journey. Although they can be unnerving, they don’t need to derail your financial plans. It’s important to remember that every investor, from professionals to everyday individuals, may feel the impact of a market downturn.

This includes anyone with investments in:

• Stocks and Shares ISAs
• Pensions (for example, SIPPs or workplace schemes)
• General Investment Accounts
• Robo-advisor platforms
• Company share schemes
and more…

If you’ve been planning to use these funds for significant financial milestones, such as purchasing a home, retiring, or funding education, a drop in value can be concerning. It may alter your timeline or prompt adjustments to your plans. Therefore, it’s essential to assess how much of your investment is allocated to short-term goals versus long-term ones.

Key Sentiment: Risk is part of investing and that’s not always a bad

It’s important to recognise that investing always involves risk. The value of your investments can fluctuate, and past performance doesn’t guarantee future results. While this uncertainty can be uncomfortable, risk is not something to fear it’s something to understand and manage. Your level of risk tolerance will depend on various factors, such as your age, financial goals, and comfort with market volatility.

For example:
• An individual at the start of their career may choose a Stocks and Shares ISA, as they might be more willing to take on higher-risk investments in pursuit of long-term growth.
• An individual nearing retirement may prefer a more conservative investment approach to reduce exposure to market fluctuations and protect their savings.

How to protect your financial wellbeing

1. Keep a long term perspective

Markets naturally experience periods of growth and decline. Avoid making emotional, knee-jerk reactions to short-term market dips. If your investment goals haven’t changed and your portfolio aligns with your risk tolerance, sticking with your investment plan might be the best approach. Short-term fluctuations are part of the process, so stay focused on your long-term goals.

2. Diversify your investments

A well-diversified portfolio can help manage risk effectively. While stocks may offer higher returns, they also come with more volatility. Bonds, on the other hand, tend to be more stable but offer lower returns. By holding a mix of assets, you can cushion the impact of downturns, helping you stay confident in your investment choices, even during times of market uncertainty.

3. Maintain an emergency fund

Keeping an emergency fund in an instant access account, provides financial flexibility during market downturns. This buffer ensures you aren’t forced to sell investments at a loss and gives you time to adjust your strategy if needed. A solid emergency fund allows you to make decisions without panic, even when markets are volatile.

4. Understand your investment accounts

Whether you’re investing in a Stocks and Shares ISA, a pension fund, or other investment vehicles, understanding your investments is empowering. Familiarise yourself with the risk levels, fund fact sheets, and long-term performance. This knowledge helps you make informed decisions and adjust your strategy when necessary.

5. Stay disciplined

How you respond to market downturns can significantly influence your long-term success. It’s natural to feel the urge to sell when markets decline, but doing so may limit the opportunity to benefit from a potential recovery. Historical data suggests that maintaining a consistent investment approach during downturns can contribute to more stable long-term outcomes.

6. Consider rebalancing your portfolio

If you’re managing your own investments, rebalancing is essential to keep your portfolio aligned with your risk tolerance and goals. This involves periodically adjusting your mix of assets by buying and selling as necessary. If you invest through a managed ISA or pension, the rebalancing is handled for you. Regardless, it’s important to periodically review your portfolio to ensure it continues to reflect your objectives.

7. Adjust your plan if necessary

If a market downturn threatens your ability to reach your financial goals, it may be time to adjust your plan. Consider saving more or extending your target date but avoid the temptation to “catch up” by taking on more investment risk. Instead, focus on a sustainable approach that aligns with your financial situation and long-term objectives.

Above all else, if you’re unsure on what to do, seek professional advice.

If you’re uncertain about how a market downturn is impacting your portfolio, speaking with a regulated financial advisor can provide peace of mind. A professional can help you refine your financial goals and recommend an investment strategy tailored to your unique circumstances.

Disclaimer: This article is intended to provide general educational information regarding recent market fluctuations and should not be considered investment advice or a recommendation to take action based on the information provided. For personalised guidance tailored to your financial situation, please consult a licensed financial advisor.