Your toolkit for handling market movements
1. Know your why
Before you invest, it’s important to define your purpose. Are you saving up for a house deposit in five years? Or is this money for your retirement in 30 years? Your investment time horizon is crucial because it influences how much risk you can comfortably take on.
An easy way to determine your investment time horizon is by asking yourself ‘when do I want to achieve my goal?’. For a long-term goal – and all investing goals should really be long term, ideally five years or more in the future – a short-term dip in the market is just a blip on the radar. The key is to have a plan and stick to it, regardless of what the headlines say.
2. Don’t put all your eggs in one basket
Imagine you’ve got a fantastic business idea, but you only sell one type of product. If demand for that product drops, your entire business is at risk. It’s the same with investing. Diversification means spreading your money across different companies, industries, and even countries.
This way, if one part of the market is struggling, your other investments might be performing well, helping to balance things out. It’s a simple but powerful way to manage risk.
3. Keep your emotions in check
Our brains are hardwired with a few quirks that can trip us up in the markets. We often feel the pain of a loss more intensely than the joy of a gain (loss aversion), or we get too excited by a recent success and assume it will last forever (known as recency bias).
When markets are volatile, it’s easy to get swept up in the emotion. But a smart investor knows when to step back and think rationally. Instead of making rash decisions, take a moment to ask yourself: ‘Has anything fundamental changed about the company or fund I’ve invested in?’ If the answer is no, it might be best to stick to your plan.
4. Find the opportunity
Market fluctuations can actually be a great thing for disciplined investors. When market fear takes over, great investments can sometimes be undervalued or ‘go on sale.’ This presents a perfect opportunity for long-term investors to buy into solid businesses at a lower price.
By preparing for volatility and viewing it as a natural part of the investment landscape, you can transform it from a source of stress into a source of potential. The goal isn’t to get rid of the movements, but to learn how to ride them with confidence.
5. Practice pound cost averaging
One of the simplest ways to handle market swings is by using pound cost averaging. This just means investing a fixed amount of money at regular intervals – like £10 every week.
By doing this, you’re buying more shares when prices are low and fewer when they’re high. Over time, this can help reduce your overall average cost per share and takes the guesswork out of trying to ‘time the market.’
Summary
Ultimately, while market movements are an inevitable part of investing, they don’t have to be a source of stress. By having a clear plan, staying disciplined, and using smart strategies, you can turn a period of market uncertainty into an opportunity to build wealth over the long term.
Remember, your journey to growing your money should be an exciting one, not a stressful one.
Capital at risk. All investing should be long term. The value of your investments can go up and down, and you may get back less than you invest.
Tax treatment depends on individual circumstances and may be subject to change in the future.