How to Survive the Market
Entering the financial world can sometimes feel like the equivalent of dressing up as Rambo and storming into a jungle, unaware of what’s ahead but ready to take what comes. While we get the fear, it doesn’t have to be like that! So sit back and relax, because we’re about to give you our best strategies on how to survive the market
Markets can sometimes take a turn for the worse. Even experienced investors can get bouts of anxiety and become emotional when this happens. For example, the 2008 financial crisis saw a loss of trillions of dollars of wealth – enough to give heads of state a headache, let alone your average investor.
As the evidence after the crisis shows, however, it’s still possible to weather the storm if you have the right plan to hand. Follow this checklist and you’ll be able to survive any market-based jungle you encounter.
Start with an emergency fund
Before you make any steps towards investing, you should always start with an emergency fund. This will act as your back-up plan and the bedrock of your financial security.
So as step one of your plan, save up some money for potential rainy days – this could be a job loss, car repairs, or an unexpected bill. It’s typically recommended that you put away three months worth of your average monthly expenses.
Stick this money into a bank account where you can easily access it.
Diversify your investment portfolio
Diversification basically means that you’re not risking everything on one single bet. If you did, then that single share or bond would determine your financial future – if it went up, you would gain, but if it happened to drastically go down, you’d lose a lot.
Let’s put this into the real world. Say you invested all of your money into airline companies. If the airline industry suddenly experienced a serious crisis, you would likely find that most of the stocks would see a decline.
By diversifying you’ll be able to better weather the stock market’s ups and downs. Putting your money into different stocks, bonds and/or funds can help you achieve this.
In practice, a diversified portfolio will probably include stocks in technology, energy, commodities, or any other range of industries. It will likely also include bonds and some cash.
Once you have a diversified portfolio, you’ll have investments that are subjected to different market risks. This can help to cushion the blow if the market goes south for a particular asset. If you diversify by region as well as by asset, you’ll be better protected from global shifts too.
ETFs help to broaden your investments
Rather than investing in individual stocks, you could also invest in an exchange-traded fund, or ETF. An ETF is an investment fund that is traded on a stock exchange. These funds invest in numerous companies at once, so can help to instantaneously spread your risk and expose you to a wider range of companies.
Different ETFs will focus on a particular size of company, industry sector, market, or even a social goal. The ETF could specialise in commodities, consumer products, or even cloud computing.
Although it's easy to forget sometimes, a share is not a lottery ticket. It's part ownership of a business
- Peter Lynch, American Investor & Philanthropist
Diversify by investing in bonds
Bonds can play an important role in your investment portfolio because of how safe they are considered to be.
Buying a bond means that you buy debt from a government or company – this basically means that they now owe you money. The bond entitles you to periodic interest payments over time, plus the full value of what you originally invested at bond maturity. Having the right exposure to bonds can help you manage risk.
Because bonds are so safe, they tend to offer lower returns. Depending on how much risk you’re willing to take (which will be affected by age, emotion, amongst a range of things) you should increase or decrease your exposure to bonds. The more bonds you invest in, the more conservative and less volatile your portfolio will be.
All investments still contain risks, of course. But through diversification into bonds, you can help to protect yourself against the worst.
We’ve come up with some recommended portfolio mixes based on risk type:
- Conservative: 60% bonds; 40% stocks
- Moderate: 40% bonds; 60% stocks
- Aggressive: 20% bonds; 80% stocks
The type of bond you invest in can also make a difference. Bonds range from those issued by the UK government to investment grade corporate bonds and junk bonds.