Client
Portal

Unpredictability of financial climates

Back to News & Views

Strategic diversification of your investments can be your first line of defence

The world of financial markets is a fascinating and ever-changing landscape. Much like the weather, the climate of these markets can shift rapidly. One moment, everything might be calm and sunny, with investors full of optimism and bullish about the future. Then, a storm may roll in the next moment, causing the same investors to scramble for cover and reassess their strategies.

Predicting these shifts is a complex task. A sudden change can catch investors off guard even when everything seems calm. This is especially true when it comes to 'black swan' events – unforeseen occurrences that have a significant short-term impact on the markets. These events can cause major disruptions, even in otherwise stable markets.

Financial markets fluctuate due to numerous factors

Just as the weather changes based on factors like atmospheric pressure and temperature, financial markets fluctuate due to numerous factors. Investor sentiment, economic growth projections, inflation rates, geopolitical events – all these and more can cause the market's mood to shift.

These black swan events arrive as a bolt from the blue, posing a risk not significantly factored into prices beforehand. Prime illustrations of such events include the Covid-19 pandemic, the war in Ukraine, and the Liz Truss emergency mini-budget. So, faced with such unpredictability, how do you fortify your portfolio and yourself to withstand the inevitable inclement periods that characterise the financial markets?

First line of defence against these financial storms

Strategic diversification of your investments can be your first line of defence against these financial storms. By spreading your investments across a range of asset types and geographic regions, you can minimise the impact of a downturn in any one area. Also, building resilience into your portfolio is critical. This means having a mix of investments likely to perform well under various market conditions. 

These might include defensive stocks that tend to hold their value during market downturns or alternative investments that aren’t closely tied to the performance of stock and bond markets. In times of financial turbulence, it's crucial to remain focused on your long-term goals and not be swayed by short-term market fluctuations. Remember, investing is a marathon, not a sprint.

'Permanent' diverse portfolio is a strategy

Adopting a 'permanent' diverse portfolio is a strategy that can serve you well in the unpredictable world of financial markets. Timing the market, or moving into and out of riskier assets, is an exceptionally challenging task. A more feasible alternative is to maintain a properly diversified portfolio that is periodically rebalanced and possibly tilted according to the general outlook, specific opportunities and perceived risks.

This approach keeps you invested, allowing you to benefit from the long-term wealth-generating effect of asset prices. By blending a variety of 'uncorrelated' investments – those whose price movements are largely independent of one another rather than moving in tandem – it's possible to create a portfolio resilient to market fluctuations yet capable of delivering robust performance.

Balancing simplicity with variety

Ideally, your portfolio should strike a balance between simplicity and variety. It's essential to spread your investments across different sectors and areas to mitigate risk, but it's equally important to avoid creating an unwieldy 'stamp collection' of investments that's difficult to monitor and manage.

Sticking to your investment strategy is crucial, especially during periods of market volatility. Focusing on the long term rather than reacting to every passing market gyration can lead to better decision-making as an investor. If you clearly understand what your 'permanent' portfolio should look like, adjusting these allocations might sometimes make sense as asset prices fluctuate to maintain weightings and diversification.

Practising patience during market volatility

However, for much of the time, little or no adjustment should be required. Having a plan to adhere to and accepting that events will inevitably test your resolve can make navigating the financial landscape easier. Otherwise, there's a risk of slipping into panic mode and making poor, spur-of-the-moment decisions.

During periods of market stress, emotional reactions from investors can exaggerate price falls, making rational thinking more difficult. In such circumstances, it's important to remember that hasty buying or selling can result in being on the wrong end of price swings.

Value of income-producing investments

Including income-producing investments in your portfolio is another option to consider. While market volatility can be frightening, an asset's income is often more consistent than its capital value. Amidst a fast-changing economic landscape, it's easy to overlook this crucial component of your overall return.

When markets are flat or falling, the steady influx of income can bolster and stabilise the value of your portfolio. The income from your share or bond holdings is also why timing markets, or selling out then buying back in, is generally unwise as it interrupts the flow of income.

Balancing market volatility with bonds

In addition to dividend-paying shares, a common strategy adopted by investors to counterbalance the turbulence of share markets and enhance overall returns is the inclusion of traditionally less volatile bonds. In their typical form, bonds provide a fixed annual income (often called a coupon) and pledge to return the initial capital at the end of their tenure. This asset class appeals to investors willing to take calculated risks with their capital, banking on the possibility of garnering higher long-term returns than cash.

Capitalising on market downturns

The key to successful investing lies in leveraging market falls to your advantage. The objective is always to buy when asset prices are low and sell when they are high. However, accomplishing this goal requires both time and patience, and many individuals often make emotionally driven, short-term decisions that result in the opposite effect.

A significant market drop could provide the opportunity you've been waiting for to invest in an area you've had your eye on but felt was too expensive. Yet, timing the market is notoriously difficult, requiring a mix of luck and judgment. Market highs and lows are often influenced by human psychology and numerous unseen factors; thus, employing this strategy carries the risk of missing out on the long-term benefits of being fully invested.

Benefits of regular investments

One proven method to navigate the crests and troughs of the market and alleviate investment-related stress is to make regular contributions, such as monthly investments, rather than large, one-off lump sums. This approach eliminates the need to worry about market timing. By investing regularly, an investor buys more shares or units when prices are low and fewer when prices are high. Persistently investing during market drops can, over time, turn market volatility to your advantage. 

This strategy, known as 'pound cost averaging', can help smooth out the market's highs and lows over extended periods. However, it's important to remember that all investments carry risks, and you may get back less than you put in. Once you reach the stage where you're withdrawing rather than accumulating investments, you may be unable to capitalise on pound cost averaging or 'buying the dips'. This makes maintaining a diverse portfolio to reduce volatility even more crucial.

Ready to discuss your investment needs? 

Whatever wealth means to you – now and in the future – we can help you achieve your goals in every area of your life. If you need further information or wish to discuss your requirements, please don't hesitate to contact us.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

ESTATE PLANNING, TAX, CASHFLOW MODELLING, AND TRUSTS AND WILLS ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

Book your FREE, no obligation discussion today. Schedule Appointment

Sign Up to our mailing list - Receive regular news, tips and financial commentary from the Gemini Team.

Latest News

  • Inheritance Tax (IHT) represents a significant consideration for anyone looking to pass on assets to the next generation. As of the 2024/25 tax year, IHT incurs a 40% charge on the portion of an estate exceeding the nil rate band of £325,000, excluding transfers to a spouse or registered civil partner. Additionally, introduction of the main residence allowance in 2017, offering an extra £175,000 relief when a primary residence is bequeathed to direct descendants or where an individual has moved into a care home, enables individual allowances to reach £500,000 before IHT applies cumulatively. [...]

  • Individual Savings Accounts (ISAs) offer a versatile and tax-efficient way to save for the future, whether for yourself, your children or grandchildren. Now that we have entered the new financial year, on 6 April 2024, significant changes to ISAs have been introduced. [...]

  • As we embark on the new tax year, it presents an opportune moment to review your pension savings strategy, setting a solid foundation for future financial stability. Early attention to your private pension at the onset of the fiscal year is not just about cultivating beneficial saving habits; it’s also about ensuring you fully exploit the benefits and allowances available to you. [...]

  • The financial implications of care in later life are often underestimated, leaving many unprepared for the substantial costs associated with care homes. Establishing a thorough wealth strategy is key to ensuring financial readiness for long-term care needs. In England, individuals with assets exceeding £23,250 are currently required to self-fund their care home expenses. However, a new government proposal aims to introduce an £86,000 lifetime cap on care fees starting from October 2025, designed to simplify care fees planning and potentially reduce the financial burden on individuals. [...]

  • Recent research has uncovered that a staggering 51% of adults in the UK have neither penned a Will nor are they in the process of doing so[1]. This statistic encompasses 13% of individuals affirmatively declaring no future plans to undertake this task. Alarmingly, a significant portion of the older demographic, with 30% of those aged 55 and above, also finds themselves without a Will, including 9% who have decisively chosen not to create one. The primary deterrent for many is the perception of insufficient assets or wealth, cited by 26% of respondents, indicating a widespread misconception about the necessity of a Will. [...]

  • For investors, the perennial question of whether to ‘stick or twist’ with their current investments or pivot towards the perceived safety of cash is fundamental. Numerous factors influence this decision, which plays a pivotal role in the journey towards financial prosperity. The appeal of cash, particularly in uncertain times, is clear; however, a judicious choice to remain invested frequently emerges as the more astute strategy. [...]

  • Recent research findings have brought to light a striking observation: fewer than 10% of adults in the UK contribute occasional lump sums to their pensions[1]. This statistic is particularly surprising given that such contributions could significantly amplify one’s retirement savings. [...]

  • A recent study suggests that a substantial proportion of Generation Z, born from 1996 to 2010, view property acquisition as their principal avenue to amass wealth for their retirement years [1]. This perspective is slightly more prevalent within this demographic than the reliance on pensions, with 33% of Gen Z individuals planning to utilise property as a retirement fund compared to 30% who favour pensions. [...]

  • In an era where the lines between work and personal life are increasingly blurred, a new study sheds light on a concerning trend among UK employees. Despite advancements in workplace policies and a growing emphasis on mental health and wellbeing, a significant number of workers are still pushing themselves to work even when they are not in full health. [...]

  • A recent study reveals a promising trend among 45- to 54-year-olds in the UK[1]. Six out of ten individuals in this age group are actively working towards bolstering their retirement savings[2]. These mid-lifers are prioritising their future financial stability, implementing changes in their current spending habits to ensure they can support themselves later in life. [...]

  • 3 weeks ago

    For employees, auto-enrolment is a crucial component to consider in their retirement strategy. Understanding auto-enrolment becomes critical as we increasingly understand the need for adequate retirement preparation. Historically, while some companies offered their employees the chance to contribute to a pension fund for retirement preparation, others did not. [...]

  • A Self-Invested Personal Pension (SIPP) is more than just a pension. It’s a gateway to financial freedom that can offer you an unparalleled level of control. With a SIPP, you are at the helm of your investment decisions, determining how your money is invested and your pension pot grows. Whether you make regular contributions or occasional lump-sum deposits, even a modest start can significantly impact your retirement nest egg. [...]

Gemini Wealth Management Ltd is Authorised and regulated by The Financial Conduct Authority Registered in England & Wales No. 5919877 Registered Office: Gemini House, 71 Park Road, Sutton Coldfield, West Midlands B73 6BT The Financial Conduct Authority does not regulate tax and trust advice, will writing and some forms of buy to let mortgages. The guidance and/or advice contained in this website is subject to regulatory regime and is therefore restricted to those based in the UK.

Website by Mellow Marsh Software
© Gemini Wealth Management Ltd
Important Documents | Cookie Policy