Just a fifth of investors stuck to their plan during 2018 volatility

2018 proved a difficult year for investors. Volatility meant many saw the value of their investments fluctuate and it led to the majority tinkering with their long-term financial plans amid concerns. However, it’s a step that may not be right for them and could mean lower returns over the long term.

During a year that was characterised by global economic concerns and uncertainty, from Brexit to a trade war between the US and China, investment markets were volatile. In the last quarter of 2018 alone the MSCI World Index fell by 13.9%, the 11th worst quarterly fall since 1970. As a result, it’s not surprising that some investors felt they had to respond by changing plans they’d initially set out.

Responding to market volatility

Whilst investing should form part of a long-term financial plan, research from Schroders indicates that many investors decided to take action after experiencing volatility in the short term. Just 18% of investors stuck to their plans in the last three months of 2018. Seven in ten investors said they made some changes to their portfolio risk profile:

  • 35% took more risk
  • 56% moved into lower-risk investments (36%) or into cash (20%)

Despite many making changes to their plans, more than half of investors said they have not achieved what they wanted with their investments over the past five years. Interestingly, many attribute their own action or inaction as the main cause of this failure. The findings indicate that investors may recognise that deviating from long-term plans can have a negative impact, as well as judging decisions with the benefit of hindsight.

Claire Walsh, Schroders Personal Finance Director, said: No-one likes to lose money so it is not surprising that when markets go down investors feel nervous. Research has repeatedly shown that investors feel the pain of loss more strongly than the pleasure of gains. That can affect decision making.

As our study shows even just three months of rocky markets led many investors to make changes to what should have been long-term investment plans. That could potentially lead them into making classic investment mistakes. These include selling at the bottom when things feel bad or moving their money into cash in an attempt to protect their wealth, but then leaving it there too long where it can be eaten away by inflation over time.

Why should investors have held their nerve?

It’s easy to see why investors might be tempted to tinker with financial plans after seeking investment values fall. But, for many, it’s likely to have been the wrong decision.

Investing should be done with a long-term outlook, generally a minimum of five years. Volatility is a normal part of investing and any financial plan should have considered how the ups and downs of the market would affect your goals. A long-term outlook allows for dips and peaks to smooth out. Changing your position whilst experiencing volatility could mean selling at low points and missing out on a potential recovery in the future.

Of course, there are times when it’s appropriate to change your investment position. For example, a change in your income or investment goals may mean that your risk profile has changed. However, changes shouldn’t be made in response to normal investment volatility alone, they should consider the bigger picture.

Creating a financial plan that considers volatility

When you create a financial plan, it’s impossible to guarantee the returns investments will deliver. However, your decisions should consider potential volatility and what’s appropriate for you. With the right approach, you should feel confident in the plans you’ve set and hold your nerve next time investment values fall.

Among the areas to consider when building a financial plan with a risk profile and level of volatility that suits you are:

  • What are you investing for?
  • How long do you intend to remain invested?
  • What is the risk profile of other investments or assets that you hold?
  • How likely is it that your situation will change in the short or medium-term?
  • What’s your overall attitude to risk?

If you’re worried about investment volatility, please get in touch. Our goal is to work with you to create a long-term financial plan that you have confidence in, even when markets are experiencing a downturn.

Please note: The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.