Following a turbulent 2019 so far, you might be left wondering what factors you can actually control when it comes to making investment decisions.
Unpredictable political shifts – both in the UK due to Brexit, and in the US due to the current president – have complex direct and indirect impacts on the nations’ stock markets and on currency exchange rates.
For investors who typically put funds in reliable stocks then sit back and watch the dividends roll in, this may require a slightly more hands-on approach than usual.
So what can you actually control? Certainly not the markets themselves, or the national banks and their respective policy setting panels, and not the nations’ governments either.
But you can control your investment strategy and your expectations from it – including how long you will hold an investment, how much risk you are willing to face, and what rate of return you aim to achieve.
This combination of risk, return and duration creates a fine balance that gives your portfolio its unique ‘fingerprint’ and which you can weigh up when considering any individual future investment.
Long-term small gains
The old adage says “take care of the pennies and the pounds will take care of themselves” and in long-term investment this is, to a large extent, true.
If you are able to hold on to investments for a longer period of time, fractional gains can start to compound to give you a greater return in the future.
This is the principle of a pension fund, where the earlier you invest (generally speaking) the more you can expect to get back for your money.
Of course there is a compromise, and it’s that you have to lock your investment away for longer or lose some of that long-term value by withdrawing the interest, dividends or capital gains.
Depending on the market, you may also be able to make more money by investing elsewhere over the short term, especially in a climate such as 2019 when stocks are more volatile.
Coping with volatility
High volatility in itself is not necessarily a reason to avoid those traditional steady-gain stocks, as long as you can weather any short-term economic shocks.
In principle, volatile markets are likely to post above-average gains as well as any falls in value.
That may give you pockets of opportunity to withdraw your funds at 20-30% gains, while over the long term the markets still typically trend upwards so you can make around 10% return even though your stocks may have dropped at some point in the interim.
However, there is always the risk of a significant economic shock such as the credit crunch, sub-prime lending crisis and global recession that began in 2007-08, which can leave your portfolio down on value for the foreseeable future.
If you are likely to need to withdraw your money within the next decade or two – perhaps because you are close to retirement – then it is perhaps less wise to invest in a way that relies on keeping those funds in place for 20 years or more.
Assets can give you a physical commodity to support the value of your investment, from metals and minerals to real estate.
Holding them for the long term again allows you to make incremental gains and ride out any short-term shocks, and gold in particular is seen as the traditional way to ‘store value’ in turbulent times.
Remember when buying a commodity like gold to buy it in bullion form, so that you don’t have to pay the premium for workmanship when buying something like gold jewellery or other ‘artistic’ pieces.
An alternative way to hold assets is to invest in an asset-based exchange traded fund (ETF) that targets the commodity or commodities you are interested in.
ETFs target all kinds of indexes, from specific sectors or commodities, to top tables like the FTSE 100, allowing you to profit from gains on many different levels.
Your total rate of return will generally be governed by the amount of risk you are willing to take on, but even a fairly conservative investment strategy can yield positive returns of 5-10% from ETFs in the short term.
Leveraged investments are not for the faint-hearted as they do run the risk of owing substantially more than your initial investment, but again there are conservative strategies to cover your losses.
You can focus on funds that only use a very small leveraging factor – for instance, a factor of 2 on a leveraged ETF would mean that if the value dropped, you would owe double the fall in value.
In a falling market, you can also sell ‘put’ options, not only receiving payments upfront from fellow investors, but also potentially gaining shares in companies you would like to add to your portfolio.
By balancing the two sides of your portfolio, you can make sure that your strike prices more than cover your entry prices, so that at the very least you will make modest capital gains.
This type of hedging is a hallmark of more seasoned investing, allowing you to remain active in turbulent markets while still achieving a profit, and reinvesting any gains back into your portfolio so you are ready to reap the maximum possible rate of return when markets rise.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.