Why investors should keep calm and ignore the noise – even when markets are volatile
Camilla Esmund, senior manager, interactive investor – the UK’s second largest investment platform for retail investors
This is not financial advice and is for educational purposes only
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To quote Kobe Bryant: “Never get bored of the basics.” It’s a phrase that resonates with many areas of our lives. We’re now into the new financial year – a time of year that often sharpens our focus on making money work harder for us. That’s from thinking about ISAs, to SIPPs (self-invested personal pensions), and making the most of those important tax-free allowances.
But as US equity markets dropped and countries turned to inward-looking strategies in the face of rising geopolitical tensions, I’m very conscious about the impact this volatility has emotionally on investors – and the risk of knee-jerk investment decisions, or people just sacking off investing altogether.
Our research already shows that there’s a belief that markets are inherently risky. This is a myth we work hard to debunk using the core fundamentals of long-term investing.
Now is a good time to take a step back from some of this noise, but this doesn’t mean burying our heads in the sand. It means being mindful of our decision making during this time. We’re all human, so when we start seeing our investments go ‘into the red,’ of course our emotional instincts are going to kick in.
But time in the market is what counts, and it is vital not to let short-term (in the grand scheme of things) turbulence blow long-term plans off course.
Taking a step back from the noise
We live in a world where we are constantly bombarded with information – which can be incredibly overwhelming, and sometimes, counterproductive. Occasionally, we need to step away for a moment.
The financial world is no different. Staying informed and taking an interest in financial markets is fantastic, but with the Trump tariffs and the market-sell offs dominating headlines, understandably it’s enough to make investors nervous.
I’m not going to pretend that trying to block out some of the market noise is easy. It isn’t. Market jitters are never easy to stomach, especially when they cast a shadow over pensions, ISAs, and long-term investments. But we must remind ourselves that history tells us that volatility is part and parcel of investing – and that markets have a remarkable ability to bounce back.
What can we learn from the history books?
Markets fluctuate, but they are resilient over the long-term.
According to Barclays’ Equity Gilt Study 2024, UK stocks have on average returned 3.1% a year in real (inflation-adjusted) terms over 20 years. In contrast, cash has lost 1.8%. US equities have fared better, up by 6.4% a year over the same period.
The history books show that stock markets do recover from sharp falls. Data from fund firm Mirabaud Group shows that historically, it has taken the S&P 500 index an average of 19 months to recover from a fall of 20% or more (which is classed as a bear market).
What does this mean from a retail investment perspective?
In terms of approach, drip feeding investments monthly can be especially effective and might be worth considering. Especially if you’d otherwise be tempted to panic sell.
By regularly drip-feeding money into the market, it helps smooth out these inevitable bumps over time, as you’re not putting all your eggs in one basket at a single point in the year when markets may be high or low.
This strategy also benefits from what is known as pound-cost averaging. When stock markets fall, the regular investment purchases more shares or fund units. Conversely, when stock markets rise, fewer shares and fund units are bought.
A reminder to diversify
Diversification – which means spreading your ISA/SIPP investment portfolio across different regions, asset classes, and sectors – is vital (yes, I probably sound like a broken record). And this is case in point.
This approach spreads your risk, which reduces the volatility of your overall portfolio. A mixed investment approach – which we see ii customers taking – gives a portfolio ample opportunity to grow, while guarding against short-term volatility.
The retail investors who are keeping calm and carrying on
interactive investor customers are a great case study in getting the basics right – helping to weather geopolitical storms and market uncertainty without panic-selling.
With impressive ii customer performance over the last five years – a period that has seen some highly choppy markets, including market turbulence following the Covid-19 outbreak – the proof is in the pudding.
In fact, over the five years to the end of 2024, the average ii customer portfolio grew by 25.1% – slightly ahead of the 24.05% return delivered by funds in the IA Mixed Investment 40–85% Shares sector (we use this as a comparator because it has a similar mix of investments to ii customer portfolios).
Keep a cool head and think long-term
The prevailing message is: It won’t always feel easy but avoid making any rash decisions. Knee-jerk reactions risk crystallising losses. But a calm, diversified strategy remains the best defence against uncertainty.