The last few months have been a tumultuous one for investors, with economic and geopolitical events affecting savings and investment. Investors all over the world have seen their portfolios suffer this year. The S&P 500 plunged more than 20%, and the FT-SE 100 index dropped by 3%.
Besides, the world has experienced several changes, including increased economic fear, post-pandemic global inflation, China’s extended lockdowns and rising interest rates. We have also seen the Russia-Ukraine war disrupt the global economic trade. The rise in oil prices has caused many countries to impose trade restrictions or even close their borders altogether.
Consequently, the UK is threatened by stagflation, and the US is suffering its worst inflation in years. As the recession threatens Europe, investors are left wondering what could be done to protect their money. In this article, I’ll look at what’s left of the year 2022 and how to protect your savings and investment, according to experts.
Prepare for More Uncertainty
Even if you’re an experienced investor, you can’t always predict what will happen in the economy or financial markets. Sometimes things turn out better than expected, and sometimes they don’t turn out as well as expected.
Even if your investment portfolio is performing well now and seems like it will continue to do so in the future, there are still plenty of things that could go wrong that would negatively affect its value. The key is being prepared for these possibilities before they occur so that when you encounter them, you’re ready with a plan for what needs to be done next.
According to Brian Byrnes, Head of Personal Finance, Moneybox, the more you know about the risks associated with your investments and how to respond if those risks materialise, the better off you’ll be. The more prepared you are for any situation, the less likely a negative outcome will affect your financial future.
Have and Commit to a Strategy
It’s essential to be specific and realistic about what you hope to achieve, as this will help shape the rest of your strategy. Once you have defined your goals and time horizon, an investor needs to understand their level of risk tolerance. For example, some investors can stomach fluctuations in the market but may not be comfortable with high volatility—and others would rather avoid market fluctuations altogether.
Investment style said Rob Morgan, Chief Investment Analyst, Charles Stanley, also influences how much risk an investor can handle. Some investors prefer passive strategies (such as index funds), while others are more inclined toward an active management style (such as individual stocks). There are many different styles out there; find one that fits with where your strengths lie as an investor.
Liquidity is the Same as Volatility
Liquidity refers to the amount of cash available to you at any given moment, and it’s a key measure of your financial health. It can be considered risk tolerance in reverse — it represents how much uncertainty and risk you’re willing to take on to meet your goals. Volatility, on the other hand, refers to how much the price of an asset fluctuates in response to news or market conditions.
According to Alice Haine, Personal Finance Analyst, Bestinvest, investors want to invest their money in things that are both liquid and volatile. They want to put their money in assets that will rise in value over time but also have the potential for significant price fluctuations. This allows them to take advantage of both opportunities for growth and potential losses.
When you look at the stock market from a long-term perspective, it becomes clear that there are periods when volatility increases significantly and periods when it decreases significantly. This can lead to trouble for investors who do not know enough about their investments or what drives these changes in market conditions (such as company news).
To ensure your portfolio remains balanced throughout this transition period from high volatility to low volatility, Annabel Brodie-Smith, Communications Director, AIC, finds it essential to diversify your investments.
Invest in the Long-term
If you’re looking to build a sustainable retirement fund, Alice Haine feels long-term investing is the way. Just because the stock market has dropped doesn’t mean it will be like this forever. It’s always best to have a long-term view of investing and try not to get too emotionally attached to every little up or down. Investors who remain calm during such times can benefit significantly from the price dips.
The stock market has been a roller coaster ride this year. With each peak, you can be sure that a valley will follow. But while the peaks and valleys are guaranteed, you don’t have to be victims of their whims.
You can invest in the long-term by buying stocks with low volatility, and you can also buy bonds that will protect your portfolio from downturns. With these strategies, you’ll be able to ensure that your investment strategy isn’t affected by short-term volatility.
Valuations Are Important
In the short term, valuations don’t matter. This is because stocks are forward-looking assets and only reflect what investors expect will happen in the future. If you buy a stock today and it goes up by 10% over the next year, this doesn’t mean your investment was better than it would have been if you had waited until tomorrow to buy it. It means that investors’ expectations of the company’s prospects increased over time, and thus its share price rose accordingly.
However, long-term valuations do matter — and for two reasons: firstly, they reflect whether or not an investor thinks an asset is trading at too high or too low of a price relative to its underlying fundamentals (i.e., what it earns). Secondly, they indicate how much room there is left for upward growth before prices become unsustainable due to either demand constraints or inflationary pressures from rapid growth rates.
Whether short-term or long-term, Scott Spencer, Investment Manager, Columbia Threadneedle Investments, submits that valuations remain a decisive factor for the rest of 2022. According to him, retail investors, especially, should learn the essence of valuations in investments.