When it comes to investing, it’s often best to create a tailored financial plan and leave investments for the long term without tinkering. However, it can be tempting to make adjustments. Whilst this may be the right decision in some cases, it’s important to weigh up if it’s right for you.
Given the recent market volatility, you certainly wouldn’t be alone in wondering if you should withdraw from the market or go about changing your investments. However, it’s important to look at your motivations for making changes to understand if it’s the right decision for you.
Here are five questions you should ask yourself if you’re thinking about changing your investments.
1. Why do you want to make changes now?
The first thing to think about is why you want to make changes.
Is it due to current market conditions? If so, it’s normal to be nervous when investment values fall, or markets experience a period of volatility.
However, you need to keep in mind that short-term volatility is normal, and this is why you should only invest with long-term goals in mind. Looking at the bigger picture, if you’ve been invested for several years, it’s likely that you’ve benefited from gains too. Keeping this in mind can help put the recent market activity into perspective.
When you first begin investing, your financial planner will discuss the peaks and troughs that you are likely to experience in the short term. Your portfolio will be stress-tested with these in mind.
2. Have your long-term financial goals changed?
What do you want to achieve when investing?
The answer to this question should be central to the decisions you make. When setting up an investment portfolio, you should have considered what your end goal was. Did you hope to supplement your pension by creating an additional income in retirement in 30 years? Or perhaps you wanted to build a nest egg for your children that they will have access to in ten years?
If your goals have changed, it’s wise to review your investments and wider plans. There may be cases where adjustments are necessary to align investments with goals. But if your goals have remained the same, it’s likely that your portfolio, which was built with these in mind, remains appropriate for you.
3. What is your investment time frame?
Even seasoned investors can worry during market volatility. So, keeping your time frame in mind is important throughout the investment process.
As short-term volatility is normal, investing in equities is not usually advised if you have a time frame of fewer than five years. That’s because there is less opportunity for your investments to recover from periods of downturn.
When you look at investment performance over the long term, you should see an overall increase, as this chart shows:
Notes: Cash = ICE LIBOR – GBP 3 month; global equities = the MSCI World Index; US equities = S&P 500; UK equities = FTSE All-Share; inflation = Retail Price Index, (Jan 1987=100); global bonds = Bloomberg Barclays Global Aggregate; European equities = MSCI Europe; UK gilts = ICE BofA; UK gilt (local total return) emerging market equities = MSCI emerging markets; all shown gross of taxes and of fees and in GBP.
Source: Bloomberg and Factset and Bank of England, as at 31 December 2019
This chart shows what £10,000 invested in 1990 in a range of investments, including US, UK and emerging market equities, was worth at the end of 2019.
Despite many volatile periods, £10,000 invested in US equities in 1990 was worth £210,250 on 31 December 2019, equivalent to a 10.69% annualised return.
Compare this to cash, where £10,000 invested in 1990 grew to £36,071 during the same period – a 4.37% annualised return.
Generally speaking, the longer the investment time frame, the more risk you can afford to take, although the time frame isn’t the only area to consider when building a risk profile.
4. Is your situation different now?
It’s not just your goals that affect financial decisions but your situation too.
When you made your financial plan, you would have considered areas such as income, savings and existing protection policies. In addition to these financial areas, lifestyle considerations are factored in too, such as whether you have any dependents.
Whilst it’s often advised to stick to your existing financial plan, there needs to be some flexibility too. If your situation has changed, it’s wise to review the steps you’ve taken to see if they still suit you.
For example, you may want to review your plan after you have children, achieve a promotion or receive additional employee benefits. Some of these areas may affect the investment proposition that is right for you.
5. Has your risk profile changed?
Numerous factors affect your risk profile, and some of these will change throughout the investment period.
If this is the case, you may want to review your investments. However, this shouldn’t be done just because values have fallen. It’s important to keep in mind that all investments involve some level of risk but, by choosing an appropriate risk profile, you can match this to your circumstances and goals.
Get in touch
Before you consider changing your investments, please get in touch. We’ll be happy to review your current portfolio in line with your long-term goals to highlight where change may be necessary or advise you to stay the course with your current investment plan.
Please get in touch or call (01372) 724 249.
The value of your investment 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.