It is fair to say that the last few months have certainly been the most tumultuous since the Covid crisis of early 2020. In the last week alone, markets have been in free fall in response to President Donald Trump’s far-reaching international trade tariffs, with all major global markets in the red.

The US stock market, the biggest market in the world, has been particularly impacted. The S&P Stock Market Index – always an accurate barometer of American stock market performance – is down 12% in the last month and 15% for the year to date. Despite a very long and positive bull run (pretty much since April 2020), the markets have now been forced into a period of rapid correction. This reduction is in turn reflected in the performance of managed funds which make up the majority of our clients’ Pension & Investment portfolios.

We are not over the worst yet with a trade war possibly now triggered. China announced a 34% tariff on all US imports in response to President Trump’s measures with North America, Europe and Asia also expected to respond in kind. But if you’re tempted to start moving things around in your portfolio for damage control, now is probably not the best time. In fact, it could damage your long-term goals.

This advice may seem simplistic in the face of such an unprecedented economic hit and upending of decades of globalization. And indeed, even those who have followed the markets closely for decades are a little shaken, with some of the wealthiest investors moving away from US equities.

Still, the worst thing to do when the market falls so abruptly is to act rashly. With no one knowing what will happen next, decisions should be made very carefully.

History, and in particular the last 25 years since the dot.com bubble crisis of 2000-2002, has shown us that markets will always bounce back after major world events. What we don’t know is how long that will take. The protests across all American states over this weekend is a sure sign that Trump’s policy on international tariffs are not universally accepted, especially when it comes to the damage it is doing to their 401k pension funds. Of shorter term concern is the significant inflationary damage that his measures will inflict on the ordinary American. Not even he can sustain the weight of public discord so he may have to row back on these measures sooner than he thinks. This will calm the markets.

From a practical point of view, the obvious temptation is to transfer all of your funds into lower risk portfolios ie take the “cash position”. In effect, this achieves little else except crystallises your losses and runs the further risk that you miss the inevitable pick up when stock markets recover.

Of course, we are not suggesting that you do nothing and everything will be alright. That would be a naïve assumption. We strongly recommend that you review your attitude to risk, your expectations of growth and also your expected investment time horizon.

The latter point is extremely important. The consistent message we have always advocated to our clients is that you have to stay the course with risk-based investments. Clients need to take a longer-term view of their pensions in particular, as in many cases the time horizon may be anything from 5 – 40 years. The rule of thumb is – the closer you are to taking retirement benefits, the less risk you should be taking. This is called “de-risking”. This approach typically kicks in from no less than 5 years out from your expected retirement date but depends entirely on your own personal preferences and expectations.

In summary, here are our 5 Top Tips on how to react to Stock Market Volatility:

1. Keep your head and stay the course – Stock market volatility is par for the course when it comes to pensions and investments. No matter how much you might want to change tack given the recent volatility, there is no way to go back and change your portfolio in the past. You can only plan how to manage it in the future. Our mantra is and always has been – “It’s not about timing the markets, but time in the markets”. Never has it been so true as now.
2. Don’t cash in your investments – Invested money should never be at risk of needing to be withdrawn in the short-term so it is vital to ensure that you have adequate cash reserves if and when needed. This is a consistent theme in all our planning consultations and ensures that invested funds are left to achieve long term growth.
3. Better Days are Coming – Most gains are made in just a few days every year—if you exit stocks and try to time your way back in (which 100% of advisors will say to avoid doing), you are very likely to miss the rebound. That will hurt how much wealth you will be able to build in the longterm. In fact, over 75% of the stock market’s best days occur during a bear market or the first two months of a bull market according to historical data from several of the leading stock market analysts, including the Financial Times and Bloomberg.
4. Reassess your Portfolio – Now is a good time to look at what are called your “Asset Allocations”. You need to know where the majority of your pension or investment fund is weighted towards. We have always recommended that funds are invested across a broad range of asset classes including stocks, bonds, commodities, cash and other alternatives such as property and ETFs. This ensures “diversification” and that drops in one area may be counter balanced by gains in other areas. For instance, there has been a surge in Gold Funds, particularly in the last 3 months, which has neutralised stock market losses for many investors. Bonds have similarly performed well in the last year or so.
5. Expect further volatility – Though it’s impossible to predict what the markets will do, many analysts and observers expect it to fall further still. Investors could be in for a prolonged pain period, particularly if Trump’s trade war continues and the U.S. falls into a recession. And no one knows what the president will do next—which is fuelling the uncertainty in the markets. That said, the market may have likely already factored in expectations around trade policy – only time will tell. Instead of making major changes to your portfolio based on policy announcements or deadlines, it’s typically wiser to stay diversified and focused on your long-term financial goals, especially during periods of uncertainty.