Brexit is by no means the only cause of this market volatility, but it is of course an important driver of the UK stockmarket’s recent oscillations. The vexed question of the UK’s future relationship with the European Union will continue to test investors’ nerves for some while yet.
During times like this, emotions can easily overcome sound investment decisions. Ultimately, taking a longer-term approach – ignoring the day-to-day ups and downs of the markets – can help you achieve your financial goals.
Here are three reasons why it is worth keeping perspective.
1. Panicking can prove costly
When markets fall, it may be appealing to sell up and wait until markets feel less turbulent to reinvest your money. While this may feel like a safe course of action, it is in fact rather risky.
Knee-jerk decisions to sell your holdings in a downturn could mean you crystallise any temporary losses. Of course, there are no guarantees that holding on will prove profitable, but panic-selling risks permanent losses.
Over the long term, it is important to remember that ultimately it is not day-to-day changes in asset prices that matter, but what your investments have returned by the time you come to sell them.
2. Timing the market is tricky
It can be tempting to think that we can selectively dip and out of the markets, missing the worst of any downturn and buying back in after asset prices have fallen further.
It is possible to do it, of course, but even the most experienced investors find this challenging. This is because the direction of markets over the short term is so hard to reliably predict. Trying to time the market in this way means you have to be right twice – when to sell up and again when to reinvest.
It is just as easy to time it poorly, selling when prices are at their nadir before a recovery. You would then be left worse off if you either buy back in at higher prices – meaning you end up with fewer shares (or fund units) than before – or not at all, missing out on the long-term gains that investments have the potential to deliver.
3. The only certainty is uncertainty
Even once we move on from the political impasse created by Brexit, however and whenever the saga is resolved, that will not be the end of turbulence in global markets.
Indeed, much of the volatility in the value of investments over the past couple of years is attributable to trade tensions between the world’s two largest economies, the US and China, as well as concerns over the health of the global economy.
The future is always uncertain. Rather than being distracted by short-term news, or peaks and troughs in the market, it can be a sounder strategy to focus on the reasons why you invested in the first place.
So long as your investment goals are long-term, it is important to maintain a long-term view. Keeping this perspective could help avoid hasty decisions with your investments – and could help avoid the nail-biting ritual of checking their value day in, day out.
The value of investments and the income from them will fluctuate. This will cause the fund price to fall as well as rise. There is no guarantee the fund objective will be achieved and you may get back less than you originally invested.
The views expressed in this document should not be taken as a recommendation, advice or forecast.