With 2024 coming to an end, investors around the world may be feeling optimistic. Global inflation is beginning to subside, most central banks have begun to reduce interest rates, and many of the government elections that cast uncertainty over markets have now taken place.
Alongside these positives, stock markets have generally performed well over the past two years. If you were able to hold your nerve and weather the market volatility in 2020 and 2022, you might be reaping the rewards as 2024 comes to a close.
While markets are on the up, it may be a good time to think about how you can manage any volatility that might come along in the future – just like a lifeboat crew might practise their emergency drills while safely docked in the harbour.
That way, you’ll be proactively preparing how to respond if and when a “storm” hits, so that you can continue to make sensible decisions rather than reacting in the moment.
Historical data offers helpful insights into market trends
We have around 100 years’ worth of data on market behaviour, and one of the things the data shows is that markets tend to rise in three out of every four calendar years, on average. While this is reassuring, it also demonstrates that it’s not unusual to experience a year in which markets decline. What we can’t know is when this might occur.
The past two years have seen most stock markets outperform on the whole, so it’s important to keep in mind that a process known as “mean reversion” could occur. This doesn’t necessarily mean that volatility is imminent, it just means that the returns you’ve seen over the past two years may not last over the long term.
By tempering expectations and understanding more about historical market trends, you can be prepared for whatever may happen next for your portfolio.
Having a tried and trusted investment strategy can help you to weather future storms and continue working towards your goals
One of the key factors in a successful investment strategy is ensuring that you can comfortably cover any short-term cashflow needs. This usually involves low-risk investments that may not grow your wealth significantly over the long term but could offer protection from significant market downturns. Think of them as your lifeboat, helping you to keep your money safe during market “storms”, or volatility.
Another factor to a successful strategy is a sound understanding of the long-term investments in your portfolio. Many investors mistakenly consider their investments as akin to putting everything on black in the casino. In fact, investing is about purchasing part of a real company, run by real people.
The company owners work hard to navigate economic and market developments and continue to provide value to their investors. So, short-term challenges are unlikely to have a lasting impact on your returns.
Thirdly, it may be helpful to remember that millions of individual investors, each with their own priorities at play, make decisions every day that influence market returns. As such, it’s important to remember your own objectives, rather than attempt to guess what those other investors might choose to do with their portfolios from one day to the next.
Finally, and we believe most importantly, remember that a long-term perspective is vital. If you’re investing to fund goals such as your retirement, you’ll likely need a time horizon of several decades. As such, short-term volatility is unlikely to have a lasting impact on your wealth, no matter what the financial headlines suggest.
Read more: Could a fresh perspective on the stock market help you to achieve your goals?
Having a plan can help you remain optimistic about your financial future
By reflecting on these key investment behaviours and creating a plan for yourself now, you can feel more optimistic about the future. Just like a lifeboat crew who have performed their drills, you’ll know there is the possibility that a storm could hit, but you’ll feel confident in your ability to cope with whatever happens.
Throughout history, markets have trended towards growth despite regular periods of volatility. By being prepared for these peaks and troughs and sticking to the key investment principles you’ve read about above, you can give your wealth the greatest opportunity to grow and help you achieve your goals.
