Sticking to your saving plan

When the stock market is volatile, it’s easy to think that you should sell all your investments and consider returning to the market only after things have settled down. But in terms of growing your wealth this is often a bad strategy, as the best returns are usually obtained in these difficult and volatile times. When the markets are volatile, the key is to stay calm.

For example, since the year 2000, six out of the ten best days on the stock market occurred during the turbulence caused by the financial crisis, and the other four took place during other periods of market volatility. So an investor who stayed off the market on those days actually missed out on pretty much all the equity market returns that have taken place in this millennium.

This fact is particularly challenging from an investor’s point of view because it’s often hard to tell whether high daily gains are an indication that the market has turned or whether they’re just a minor correction to a previous slide. Thinking long term, an investor should actually increase their equity weight rather than decrease it when the market has fallen significantly. Obviously this strategy requires nerves of steel and an ability to bear slightly bigger losses if things go badly. However, on the road to increasing your wealth, this is clearly a better strategy than pulling out of the market in volatile times. 

The best way to avoid unpleasant volatility is to create an investment plan – either on your own or in a meeting with an investment adviser or with our digital investment adviser Nora – and to stick to it, remembering to diversify your investments geographically and across different sectors and asset classes. With this in mind, it’s good to have the following investments in your portfolio: 

  • Equity investments, for example through investment funds or owning listed stocks directly from across the world and in all sectors.
  • In addition to these, we also recommend having a suitable proportion of your investments in the bond markets, through investment funds, for example.
  • If you have a unit-linked insurance product or a pension investment with Nordea, you can hedge your assets from market volatility by transferring some investments to an Insurance Account. An Insurance Account is a safe place to park your money for a while.

Once you’ve decided on how much you want to invest in each asset class, you should stick to your plan and accept the occasional volatility in the markets, as risks are part and parcel of investing and increasing your wealth. At the same time, you should listen to your emotions when faced with market unrest because they may tell you whether your asset class allocation based on the above recommendations is really suitable for you. If the volatility seems too much to bear, you may have taken too much risk in your portfolio. On the other hand, if you’re comfortable with the volatility and feel like you could take on more risk, it might be worth trying out a more return-focused investment profile.

Watch the video to see why you should keep a cool head in a volatile market

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One of the most common mistakes investors make is to stop saving or sell their holdings in turbulent times and pick up saving again when the market is up. However, with this tactic, you end up with lower returns than you would have had if you hadn’t sold your investments.

What to do if the stock market plunges sharply?

A sharp decline in the stock market may cause unease. A general drop in share prices will sooner or later impact everyone who invests in equities or funds. What should I do?

1. Don’t try to time your purchases and sales

It’s difficult to buy and sell at the right time mainly for two reasons.

A) You begin to see patterns that don’t exist

We are masters at seeing different kinds of patterns. We may see patterns in the historical price trends in retrospect but, in reality, these movements were just as unpredictable as a pure coincidence when they happened. We often hear stories about how someone has managed to buy or sell at an opportune moment. However, there are many more cases where trades have gone completely awry. 

B) Emotions get in the way

The decisions we make are largely based on emotions. That’s why it’s hard to sell when you’re at the top and feeling optimistic and to buy when the market reaches the bottom and pessimism abounds. Instead, it’s highly likely that your emotions will make you sell exactly at the wrong time when stock prices have already started to fall and investors are gripped with fear. Similarly, you could end up buying far too late when the stock market has picked up and investors are in a bullish mood again. 

2. Stretch your investment horizon

As long as the financial markets are functioning normally, the wisest thing for you to do is to invest in funds regularly regardless of market ups and downs. 

In the long term, regular saving will give you a better chance to earn a positive return on your investments than any attempts to sell or buy at the right moment. If you continue to save regularly in funds when the stock market is falling, you will end up buying fund units at a cheaper price – which means more units for the same saving amount. And once the market starts going up again, you’ll gain bigger returns on them.

Watch our video to find out why pulling your investments off the market can cost you dearly

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Keys to becoming a successful investor: Pulling your investments off the market can cost you dearly