Nine Tips for Investing in Uncertain Times

In times of great uncertainty, how do the most successful investors operate?

What distinguishes them from the rest?

Having spent years in the financial planning profession, being exposed to various economic cycles, here are nine tips for investing in choppy times that will serve you well:

1. Compounding

The miracle of compound interest! If dividends and interest were reinvested along the way, the value of a £1 investment made in 1990 would now be worth almost £0.72 if made in cash, $7.68 if made in bonds, and £12.88 if made in shares.

Therefore, look to maintain a steadfast exposure to assets with growth potential in your portfolio - such as stocks in some of the greatest companies on Earth - if you wish to increase your wealth.

2. Diversification

The best performing asset class from the previous year is not necessarily indicative of the upcoming year's performance.

Therefore, invest across various asset classes in your portfolio. This is especially true for assets with low correlation; those that don't typically move in unison with one another, such as stocks and bonds. A portfolio with adequate diversification is less erratic.

3. Understand Risk & Return

In simple terms, the longer you hold an asset, the larger return you should anticipate achieving, and vice versa.

There is no such thing as a free lunch, thus you should constantly take into account each asset's risk and return characteristics before investing. Long-term investors who don't mind short-term volatility can benefit from growth assets' higher expected returns.

Image by Julie Bang © Investopedia 2019

4. Time In, Not Timing the Market

It can be tempting to try to time the market during periods of temporary volatility. Indeed, if done correctly, market timing can be a fantastic way of generating some short-term gains. But, the danger of doing it incorrectly is very high and can seriously harm your longer-term gains. For instance, given that pretty much all the news is negative nowadays, selling following a significant share price drop may feel comfortable - but doing so locks in a loss and makes it much more difficult to recover.

5. Make Time Your Friend

Since 1900, there are no negative returns over rolling 20-year periods for a diversified portfolio of shares. Which is to day that the likelihood that your investments will achieve their objectives increases with a longer time horizon, even though short-term returns occasionally experience jarring changes.

6. Remove the Emotion

The ups and downs of market cycles are exacerbated by emotion. Understanding the driving forces behind emotional investing is essential in order to avoid falling into euphoric (or depressive) investment traps, which can result in poor judgement. Stay away from the emotional roller coaster.

7. Embrace Uncertainty

There's a lot to worry about right now. But, even if this raises uncertainty, in the long run, it's essentially noise. Over the past century, there have been many concerns for the global economy, but they have all been overcome.

Since 1900, global stocks have averaged annual returns of around 10%. Reduce the clamour surrounding the rapid changes in the stock market. So learn to embrace uncertainty, and turn down the noise around the short-term movements in the stock market.

Source: Bloomberg, Humans Under Management
Returns are based on MSCI World Index.

8. Look Less

Daily share market fluctuations are almost evenly spread between ups and downs. Roughly speaking, they finish up two thirds of the time each month.

Using data going back to 1900, this rises to 80% when applied to a calendar year.

In other words, you are less likely to be dissatisfied - and to panic-sell your investments at the incorrect time - if you don't constantly look at them.

9. Markets Cycle

The higher returns shares generate over time, relative to cash and bonds, is compensation for periodic short-term setbacks.

Therefore, recognise that this market cycle - like all market cycles - includes obstacles. Although market cycles don't exactly repeat, they are a reality of life... and they rhyme.

Amyr Rocha Lima, CFP® is a financial planner who specialises in working with successful professionals age 50+ to help them reduce taxes, invest smarter and retire on their terms.

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