When markets are tumultuous, maintain perspective

The simultaneous decline in stocks and bonds and the tempered expectations for market success present investors with a problem on how to react, if at all. Investors must contend with soaring inflation in most developed economies, the possibility of the end of a protracted period of “easy money” central bank policies, the war in Ukraine, and the effects of the Covid-19 pandemic, including shutdowns that could disrupt the Chinese economy, in addition to disappointing short-term returns and a spike in volatility.

The Federal Reserve (Fed) and the Bank of England both increased their respective interest rates last week, adding to an already erratic time.

Some investors may be tempted to leave the markets and move to cash due to the current economic and financial difficulties, but doing so would nearly guarantee a negative return when accounting for risk.

Future results cannot be predicted based on past performance. Since you cannot directly invest in an index, the performance of an index is not a perfect reflection of any specific investment.

Clients should also refrain from timing the market since historically, the greatest and worst trading days have coincided, making it challenging to avoid one without the other. A prime illustration of that occurred last week when US stock prices rose the day the Fed announced its rate rise before falling the next day.

Also, keep in mind that some of the finest trading days have taken place amid extended market downturns. Absence from such important trading days reduces long-term gains.

Please keep in mind that the returns data below only includes the 500 largest US-listed firms and is expressed in US dollars. However, the US market represents well over half of all shares in terms of value, and the situation is similar in other currencies.

The bottom line for investors is that maintaining a long-term investing plan may be the surest path to financial success. In the past, patient, long-term investors would have gained more from sticking with their plans than by trying to time the market when it is tumultuous.

 

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by Rachel Buscall

by Rachel Buscall

Co-Founder & Managing Director at New Capital Link. Having started her career in the financial sector, Rachel demonstrated a natural flair for entrepreneurship.

New Capital Link

Alternative investment specialists offering structured opportunities across the UK & Overseas.

New Capital Link is a boutique London-based introducer that offers unique UK & global investment opportunities worldwide.

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Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be very complex and high risk.

What are the key risks?

1. You could lose all the money you invest

If the business offering this investment fails, there is a high risk that you will lose all your money. Businesses like this often fail as they usually use risky investment strategies. 

Advertised rates of return aren’t guaranteed. This is not a savings account. If the issuer doesn’t pay you back as agreed, you could earn less money than expected or nothing at all. A higher advertised rate of return means a higher risk of losing your money. If it looks too good to be true, it probably is.

These investments are sometimes held in an Innovative Finance ISA (IFISA). While any potential gains from your investment will be tax free, you can still lose all your money. An IFISA does not reduce the risk of the investment or protect you from losses.

2. You are unlikely to be protected if something goes wrong

The business offering this investment is not regulated by the FCA. Protection from the Financial Services Compensation Scheme (FSCS) only considers claims against failed regulated firms. Learn more about FSCS protection here. https://www.fscs.org.uk/what-we-cover/investments/ or

Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here. https://www.fscs.org.uk/check/investment-protection-checker/

The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here. https://www.financial-ombudsman.org.uk/consumers

3. You are unlikely to get your money back quickly

This type of business could face cash-flow problems that delay interest payments. It could also fail altogether and be unable to repay investors their money. 

You are unlikely to be able to cash in your investment early by selling it. You are usually locked in until the business has paid you back over the period agreed. In the rare circumstances where it is possible to sell your investment in a ‘secondary market’, you may not find a buyer at the price you are willing to sell.

4. This is a complex investment

This investment has a complex structure based on other risky investments. A business that raises money like this lends it to, or invests it in, other businesses or property. This makes it difficult for the investor to know where their money is going.

This makes it difficult to predict how risky the investment is, but it will most likely be high.

You may wish to get financial advice before deciding to invest.

5. Don’t put all your eggs in one basket

Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well. 

A good rule of thumb is not to invest more than 10% of your money in high-risk investments. https://www.fca.org.uk/investsmart/5-questions-ask-you-invest

If you are interested in learning more about how to protect yourself, visit the FCA’s website here: https://www.fca.org.uk/investsmart

For further information about minibonds, visit the FCA’s website here.https://www.fca.org.uk/consumers/mini-bonds