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While the stock market has been relatively calm over the past six weeks, make no mistake about it – we’re living in uncertain times.
Banking failures, high inflation, and political turmoil… it’s all the range these days!
For investors, uncertain times can often be a challenging period, as we’ve already seen demonstrated by the performance of the FTSE 100 this year. In March, the UK’s blue-chip index shed 600 points in a matter of days, just weeks after the index hit an all-time high.
So how can investors protect their portfolio’s when times are unpredictable? And how can we expect the stock market to perform during the second half of 2023? In this article, we’re going to explore both of these questions, and more! So keep reading for all the details or click on a link below to jump straight to a specific section…
Even if you’ve a short memory, you’ll probably recall the FTSE 100 hitting an all-time high earlier this year.
On 20 February, much was made of the index surpassing the 8,000 points mark for the first time ever. In fact, following such a strong start to the year, you’d have been forgiven for thinking the FTSE 100 was at the beginning of a non-stop bull run.
Yet it didn’t take too long for reality to bite back…
In March, we learned that two US banks hit the wall following their inability to cope with – let’s face it – marginally higher interest rates. This led to a selling frenzy among investors, as many started to believe that this was just the tip of the iceberg.
And who can honestly blame investors for offloading their stocks in March?
If two banks had already collapsed amid a slight hike in interest rates, surely more could follow suit. After all, it’s no secret that there are a host of zombie banks out there unable to cope with anything other than artificially low interest rates – just ask the owners of Credit Suisse! What’s more, with inflation still a major problem among Western economies, it’s no longer a conspiracy to suggest central bank policies could now lead to a collapse in the entire global banking system.
While these economic fears remain, things have thankfully started to calm down a tad over the past few weeks. While the FTSE 100 shed 600 points back in March, the index enjoyed a mini-resurgence in April, which has been followed by a steady May (so far).
Despite this, however, wider fears for the health of the global economy certainly haven’t subsided. If the FTSE 100 tumbles by 500+ points next week, it’s unlikely many eyebrows would be raised given the unpredictable nature of the index so far this year.
With investing, there’s always a risk that you’ll get back less than you put in. Yet, when it comes to dabbling in the stock market during uncertain times, these risks are magnified. This is because a volatile market means you’ve a greater chance of seeing the value of your investments fall by a big margin over a short period of time.
Yet a volatile stock market doesn’t necessarily mean you should sell your investments and settle for a bog-standard savings account. In fact if you do this, you’re certain to earn a return that’s less than the current rate of double-digit inflation.
Instead, it’s probably better to accept that we’re living in uncertain times, and try to take into account the following tips that can help minimise your exposure to risk over the coming months…
So, without further ado, here are 4 tips on how you can invest during uncertain times.
Understanding your appetite for risk is one of the most fundamental parts of investing. That’s because your tolerance for the ups and downs is ultimately what should drive your investing strategy.
However, many investors are guilty of only thinking about their tolerance for risk after things have already gone pear shaped. This increases the chance of ‘panic selling’ and crystalising losses.
Don’t make this mistake. Instead, ensure your investments are aligned with your tolerance for risk by making an effort to regularly review your portfolio. If things aren’t looking quite right for you, then you may wish to rebalance your assets.
Reviewing your portfolio is especially important during times of economic turbulence when your tolerance for risk is most likely to be tested.
Holding a portfolio that dabbles in a mixture of assets is one of the most effective ways to reduce the risk of suffering large falls. That’s because if one or two asset classes have a particularly bad time of it, a diverse portfolio may help cushion the blow. As the old saying goes: ‘don’t hold all of your eggs in one basket’.
To learn more about the benefits of mixing things up, take a look at our article that explains the benefits of holding a diversified portfolio.
So-called ‘defensive assets’ are investments that traditionally hold their value during uncertain times.
Because defensive assets generally have lower investment risk you can expect steady, if not spectacular returns during any economic turmoil. However, this is a general rule of thumb, so don’t take it as gospel.
Examples of defensive assets include:
Aside from the above, there are also a handful of sectors that typically perform well, even when other areas of the economy might be struggling. This is why defensive assets may also include equity investments in supermarkets, healthcare, communication, and utilities.
As you can imagine, the demand for things like consumer staples and healthcare is inelastic, meaning the demand for these goods and services doesn’t really change based on the health of the economy. This is why they can be decent investments to turn to if you’re worried about a volatile stock market.
If you’re an active investor, you might actually relish a volatile stock market. That’s because market volatility typically opens up more opportunities to make a quick buck from fast, sudden movements in stock prices.
However, trading isn’t without risk. While an opportunity for quick and easy gains is certainly present when the market is volatile, fast-changing stock values also means there’s a real opportunity for big losses!
However, as long as you understand the risks, then there’s nothing inherently wrong with trying to profit from a volatile stock market. When it comes to active investing, just ensure you do your research and avoid the well-trodden trap of chasing any losses.
The stock market is difficult to predict at the best of times. However, based on how the market has performed so far this year, plus the fact that central banks around the world are likely to continue hiking interest rates, there’s every chance investors could be in for a rough ride during the second half of 2023.
More banks going under and inflation turning into hyperinflation are both real possibilities that could negatively impact the stock market. And while the IMF now tells us the UK is likely to avoid a recession this year, don’t forget that the so-called ‘experts’ often get it wrong. (The IMF was telling us the UK would enter a recession just a month ago!)
Whatever your thoughts on the current state of the world and the general health of the global economy, history has shown us that investors who sit tight are often the ones who come out on top.
Sticking to your investing strategy while maintaining a long-term mindset will, more often than not, put you in good stead for coping with any peaks and troughs that lie ahead.
To learn more about putting together your portfolio, take a look at our article that explains how to create your own investing strategy in 5 simple steps.
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Disclaimer: When it comes to any type of investing, be mindful that your capital is at risk. Remember, the value of any investment can both rise and fall. Always do your own research.
MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
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