Talk of a stock market correction had been swirling for months ahead of the wobble sparked in the US at the beginning of the year. After enjoying years of relatively low volatility and steady growth across equity markets, we can expect a sustained period of uncertainty at any point. While the blip in February 2018 was followed by a pullback it would be foolish to assume that the markets will return to the seemingly indefinite growth we had become used to.
History has shown time and again that a major market correction happens about once a decade, and analyst predictions that another is overdue have continued to gain momentum. Anything from Brexit, to the situation in North Korea, the unpredictability of President Trump, and concerns over the Chinese economy could spook investors and trigger a major market adjustment.
So, what should investors do to prepare their portfolios in case of a downturn?
– Timing the market is extremely difficult to do. Therefore, spread your wealth – don’t put all your eggs in one basket. In 2018, consider the wider political and economic issues that may impact your investments and spread your money across different sectors, markets and geographies to make sure that if there is a negative impact on one of those you have chosen, not all of your money is in danger.
– While focusing on diversifying investments, investors should certainly consider those assets viewed as ‘safe’ in times of volatility. Long dated bonds are not a particularly exciting investment, and are not as profitable in the long-term, but they have proven to be reliable at times when the market is under strain.
– Gold is also a good option, generally regarded as a “safe haven asset”, and usually recognised as a solid long-term investment. Historically, gold has kept its value over time, which is of course not a guarantee of future performance, but research has shown that in most countries gold is not linked to other financial assets, and so is a safe place to invest if the market is turbulent. Given gold’s tangible value it is a good option for a diversified portfolio as insurance to protect against adverse global events.
– Commodity-backed ETFs are a good way to gain initial exposure to this part of the market. For investors interested in physically owning commodities like precious metals there are also specialty banks or brokerages that provide direct purchasing opportunities.
– Japanese Yen is an attractive investment in times of uncertainty, particularly given the sheer size of Japan’s foreign investments. Their net foreign asset position is significant so at times of economic uncertainty, or global tension, funds can be repatriated, which increases the currency gains. Yen also has a good historical performance at times of global risk – according to a November 2016 study in the Financial Markets and Portfolio Management the currency is the strongest “safe-haven” investment in periods of excessive volatility.
– At times of uncertainty cash can be a reliable option, when held in robust institutions, because your returns aren’t impacted by stock market volatility. However, try to avoid putting too much in cash – while interest rates remain low and inflation is high, the real value of cash is falling. As a general rule, it’s sensible to hold the equivalent of three to six months’ expenditure in cash.
– In uncertain times, it’s always a good idea to adopt a defensive posture while staying invested in the equities markets. This can be achieved by targeting stocks with low return volatility. There are a number of ETFs out there that track and screen for volatility such as iShares MSCI Europe Min Vol UCITS ETF (IMV) or iShares MSCI World Min Vol UCITS ETF (MINV) – both of these feature in Selftrade’s ETF 100, a list of best performing ETFs.
And finally, don’t panic! – if you are invested for the long-term then markets typically recover; timing the market is pretty much impossible.
Find out more at selftrade.co.uk
Mark Taylor is Chief Customer Officer at Selftrade from Equiniti. Mark has recently moved into the newly created role of CCO and is a member of the Equiniti Group Executive, looking after 25 million customers.
Since joining Equiniti in 2009 with overall responsibility for its regulated business including Selftrade, Mark’s new role will see him focusing on consumer proposition and customer experience.
Mark has over 30 years’ experience in the financial services industry and was previously Director at Virgin Money and has held senior positions at Fidelity and Charles Schwab.