Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

This article first appeared in the Telegraph.

WHEN it comes to our investments, what we see is often influenced by what we’ve got. If you have bought into the stay at home, technology, growth stock story that has fuelled the market’s pandemic recovery these past couple of years, you will be looking at the market through the prism of a painful correction.

You may, for example, hold the Scottish Mortgage investment trust, a popular way for UK investors to implement this narrative. It has lost around a third of its value since November. Tesla, one of the trust’s biggest holdings, has fallen from $1,200 to $930 just since the start of the year.

If, instead, you have taken a different view of the recovery - that it would result in a resurgence of demand for commodities, rising inflation and higher interest rates - you might be more relaxed. At the New Year, the miner BHP Billiton’s share price was around £22. Today it is just over £23. Gold, a traditional safe haven in inflationary times, is modestly higher year to date. Oil is up by a tenth and the share prices of BP and Shell have tracked crude higher. HSBC, which as a bank tends to enjoy rising interest rates, has seen its shares rise from 420p in November to around 500p today.

If you are exposed to the riskier, expensive parts of the market, you will have been alarmed not just by falling prices but by increasing volatility. Understandably so. According to Goldman Sachs, the market gyrations at the start of the week were historically unusual. Since the 1980s, the S&P 500 index has only ended in positive territory after being down by 4% during the same day on six occasions. These roller-coaster days all happened at moments of severe market stress, during the dot.com bubble and at the time of the financial crisis. As Goldman observed with understatement, this is not the sign of a healthy market.

But if your portfolio is less skewed to one investment theme, more diversified and better balanced, you may well view Monday’s extraordinary round trip for what it may have been - an options driven wobble in an illiquid equity market that has nothing to do with what is actually going on in the real economy. This is clear from what is happening elsewhere in financial markets, which is not much. Take the difference in the yield on so-called junk bonds and those on safe government bonds - what’s known as the yield spread. It has hardly budged this year, which suggests that no-one is particularly concerned about the health of even less robust companies in what remains a strong recovery from Covid.

So, when you hear that Wall Street is within a whisker of completing a market correction (usually defined as a 10% fall) or that Nasdaq is in a bear market (down 20%), it’s worth stepping back and asking what is actually going on. Which in my opinion is this: we are seeing a long overdue correction in one rather frothy part of the market, albeit one that has an outsized influence on the headline level of the index due to the gargantuan size of the companies involved.

The finger of blame for the market’s latest bout of volatility is being pointed at the Federal Reserve because, not unreasonably, it has been clear about its determination to get on top of rising inflation. And clearly the hawkish shift by the Fed has got something to do with it. The shares which have borne the brunt of the sell-off are those whose impressive growth prospects benefit most from an environment of low interest rates. Cheap money reduces the opportunity cost of waiting for these companies’ future cash flows to arrive. Rising rates makes the delay more costly and unappealing.

But what is also going on is a wholly sensible reassessment of the price that’s worth paying for that promise of growth. If this were really just about the Fed, or concerns about economic growth, we would not be seeing this divergence of performance, this rotation from growth to value. This is as much about valuations and waning risk appetite as anything more fundamentally worrying.

So, how should investors navigate this newly volatile market environment? Here are five suggestions that have worked for me:

First, ignore it. This too shall pass. Some air will be released from the technology bubble and in due course the gap between the sector’s over-optimistic valuations and those in the rest of the market will narrow and investors will once again focus on those companies’ better growth prospects at a more sensible price.

Second, be diversified. It’s amazing how relaxing it is to see that while the market has fallen by 10%, your portfolio is only down by half as much because your investments are better balanced than the index.

Third, if you are still putting money into your investments, do it regularly and mechanically. That way you will force yourself to invest when it feels least comfortable. And in due course you will be glad you did.

Fourth, keep some cash in your back pocket. When the next wobble arrives that doesn’t resolve itself within a day but persists for weeks on end, and inevitably overshoots on the downside, you want to be able to take advantage. You might, for example, think that Scottish Mortgage looks a lot more interesting at £10 a share than it did at £15.

And finally, keep a notebook in which you write down exactly what you are thinking every time you make an investment. When the headlines are shouting about corrections and bear markets and market movements that have only happened half a dozen times in your investing lifetime, you can remind yourself of why you got into this in the first place. And, most likely, why that reason holds true today.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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