Tips to tackling ISA volatility

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only. ISA eligibility and tax rules apply.

If you’ve ever seen a stock price chart that sails smoothly up and to the right, be worried and ask a lot of questions. Just as you might buy and sell stocks according to your own financial goals, investment strategies and when you get paid, so do other people. That constant flow of trades, and whatever is happening to the companies underneath the share prices, naturally creates ups and downs in shares prices. It’s volatility in action and, as much as we’d like a wonderfully uneventful journey, it’s the price we pay for the hopeful long-term outperformance of shares over cash.

Given that we can’t get rid of it, here are a few ways to make peace with volatility, prepare for it and maybe even use it to our advantage.

First things first, risk and volatility aren’t the same thing. Assets like shares, bonds, real estate, commodities and cash all carry different likelihoods of their value ultimately falling to zero. On the flipside, they also offer a spectrum of potential returns. The trade-off between the two, and how much risk you are prepared to accept in the pursuit of potential reward, lies at the very core of creating an investment portfolio.

For example, you might want the potential returns that the stock market has historically demonstrated. But, the risk of loss that comes with that potential may make you want to complement your shares with another asset that brings lower prospective returns but offers less risk too - something like a government bond, maybe (although returns are never guaranteed - that’s the nature of investing).

So risk describes the likelihood that your boat ultimately sinks (bear in mind a good sailor will try to mitigate that, which we’ll come on to). Volatility is more about how choppy the waters are along the way. Sometimes it’ll be flat calm, sometimes there will be waves.

At this point, a lot of prospective ISA investors’ loss aversion kicks in. This is our hard-earned cash - why would we even consider investing in something that could lose money? As promised, it’s time for our sailor’s risk management strategies to shine.

Holding a wide range of stocks means that risk of loss is spread over more than one outcome. For example, you might like the idea behind a small up-and-coming company currently being run from a garage in San Francisco. Buying now may mean you become a shareholder in the next tech giant. Or it could mean owning part of the many startups that never make it. What if you held shares in a bunch of tech firms though, big and small, young and old? Suddenly your money doesn’t hinge on that one stock. Better still, what if you explored stocks in different industries, in different countries, with different pros and cons?

Creating a team of assets like this can soften any blows in one part of your portfolio, as things like geopolitics and industry-specific issues won’t affect all teammates in the same way. You also gain the chance to benefit from a wider set of potential success stories.

So, while there’s no surefire way to guarantee a share won’t go down, having a basket of stocks that react to the world in different ways means you are never relying on just one company.

The beauty of compounding lies at the heart of good long-term investing. Whether the companies you hold in your ISA are reinvesting their profits to make more next time, or you are reinvesting dividends to hopefully receive bigger dividends in the future, time is your greatest ally here.

Percentage of time periods in which US stocks and cash have beaten inflation 1926-2024

When you invest your capital is at risk. Past performance is not a reliable guide to future gains. Source: Stocks represented by Ibbotson® SBBI® US Large-Cap Stocks, Cash by Ibbotson® US (30-day) Treasury Bills. Data to December 2024. Morningstar Direct, CFA institute and Schroders.

There’s no guarantee that your investments will make money or beat inflation but, historically, markets have outpaced cash over longer periods. When it comes to beating inflation, the stock market tends to do a much better job than cash the longer you leave your investments to compound over time.

A stocks and shares ISA can come in handy here as its tax benefits can mean you keep more of any gains you might make.

With the importance of time in mind, there’s a real benefit to not being glued to the news and every single short-term headline. Just like a good driver scans the road, from the bonnet to the horizon, ISA investors should be aware of what’s happening in the world right now but should steer towards the distance as opposed to jerking the wheel to avoid every single crevice.

Rebalance, don’t react

Part of that means scheduling regular ISA check-ins. This could be every quarter or every six months but it shouldn’t be every second of every day. The structure can help keep short-term reactionary trades at bay and can keep you focused on your goals and keeping your portfolio set up to reflect your chosen level of risk. If your goals change, you can use your check-in to think about how that should affect your asset mix. Doing it haphazardly on the fly means you’re probably reacting to the latest news emotionally rather than factoring in your long-term goals.

To come full circle, there’s a point where our sailor has to accept that waves are part of the deal and aren’t something to solve once and for all. While it may spark fear in the beginning, long-term investors tend to get used to day-to-day changes and accept them, in the knowledge that companies’ strategies play out over months and years, not hours. Over the long haul, it’s corporate earnings that tend to inform share prices rather than short-term trends and appetites, so it’s useful to focus on the future and maybe even make use of dips when they appear.

If the fundamentals of a company haven’t changed and the shares are suddenly cheaper, it may make sense to snap up a few more. Even if you decide not to, the point is that we shouldn’t be swayed by the natural current of the stock market. Keeping a cool head and a structured approach are key to avoiding rash decisions based on a market that might change again tomorrow.

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.

Robinhood doesn’t provide tax advice. You should seek advice if you have any questions regarding the impact your investments will have on your income tax and tax filing requirements.