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.