Some of us can get more worried about potential losses than others, by virtue perhaps of our disposition or circumstances.
A danger for those of an anxious temperament is that a fear of uncertainty can lead us to costly decisions. Panicking when markets take a downward turn, for instance, can mean selling up at the worst possible moment, when asset values are at a low.
If you’re one to lose sleep over gyrations in global markets, here are three measures that could help put your mind at ease and, ultimately, help protect your investments from uncertainty.
1. Diversify your investments
Whatever is going on in the world, diversifying your investments is a golden rule. By spreading your money across not only lots of different assets, but several different types, you are reducing the chance of any single failure compromising your financial prospects.
There are two important aspects of effective diversification. The first is geographical diversification. Often market risks and uncertainties are localised, being centred around one region or country. By investing across a breadth of global assets, rather than just in the UK for example, you are minimising the danger that domestic problems will derail your financial plans.
The second element is diversification across asset classes. The value of different assets – such as government bonds and company shares – has seldom moved up and down in tandem. In periods when global stockmarkets have fallen sharply, like in the final months of 2018, the value of bonds issued by large developed governments has often tended to rise. This is because they are often perceived as ‘safe haven’ assets that are seen as being lower risk.
Remember that past performance is not a guide to future performance, however.
2. Consider alternative strategies
Choosing a combination of assets that can navigate challenging market conditions is not easy, but there are approaches to investing that look to deliver returns whatever is going on.
By giving experienced investment teams the flexibility to use a breadth of tools to profit from both the ups and downs that markets experience, they can attempt to deliver smoother returns for investors. This might involve investing across a wide range of alternative assets, including currencies and making use of financial instruments called derivatives.
Never think of these kind of strategies as risk-free investments, but if you are willing to sacrifice some potential upside – in the form of investment returns – in favour of limited potential downside – in the form of investment losses – they could be a good fit for part of your portfolio.
3. Focus on your goals
Some periods will always feel more unsettling than others. When the global economy is in a funk, it is natural to instinctively feel less confident and more cautious about the prospects of our investments than during a purple patch.
However, most of our investment horizons are measured in years, often decades, rather than weeks or months. And if you are putting your money to work for the long term, why should you be overly worried about what happens in markets tomorrow?
It might be uncomfortable to see the value of your investments fall sharply from day to day, but remember that volatility is not the same as risk. True risk is the possibility not of temporary paper losses, but of permanent losses by the time you come to sell your investments.
Focusing on your goals – whether that is to grow your savings pot during your career, or to sustainably generate a reliable income in retirement – should prevent rash investment decisions that could be against your long-term interests.
Maintaining perspective in the face of uncertainty can be easier said than done, but keeping a cool head will put you in better stead to realise your long-term ambitions – the reason you started investing in the first place.
Remember, we are unable to give financial advice and these views should not be taken as any kind of recommendation or forecast. If you are unsure about the suitability of any investment, speak to your financial adviser.
The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.