Seven investing principles for DIY investors in volatile markets

The start of the new financial year has certainly been challenging for DIY investors. Those who raced to top up tax-efficient Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs) in the run-up to the end of the 2024-25 tax year - or looked to take advantage of fresh allowances from April 6 - would typically now be spending their time considering which investments to funnel their money into. Instead, they are having to consider the ramifications of an increasingly uncertain global economic outlook as the impact from US President Donald Trump’s trade tariffs reverberates around the markets.

While investors with longer term horizons may feel less concerned about the health of their portfolio, those wanting to access their accounts in the near term for retirement, to clear debts or pay down a mortgage may naturally be more worried.

At a time when uncertainty is rife, it’s important to stay calm and avoid doing anything rash. Rather than panic and look for the exit, now is the time for investors to recall the basics of a long-term investment plan.

Here are seven investing principles DIY investors can consider during periods of market turbulence:

1. Maintain a long-term view – if you can - it's time in the market not timing the market that’s key

It can be unsettling when markets fall but the first rule of thumb in market uncertainty is not to panic or make hasty decisions. During market corrections, it can be tempting to cut your losses and transfer assets into cash but adopting a long-term investment strategy is one of the basics of investing, as it can give a portfolio enough time to ride out any short-term volatility in the market.

Of course, even the most-seasoned investors can feel twitchy when the headlines are filled with doom and gloom but making rash decisions is rarely the solution. Investors should typically have a time horizon of at least five years, enough time to allow their money to ride out any ups and downs in the financial markets. As we’ve seen recently, financial markets can be extremely volatile over short-term time periods, but it is important to remember that they have historically delivered much higher real returns – that have a much better chance of beating the effects of inflation – than cash savings over the long term.

Ultimately, volatility in the stock market is normal and the positive factor for those with a long-term mindset and a regular investing plan is that your money buys fewer shares when prices are higher and more when prices are lower, which can average out prices over time.

2. A cash buffer is essential in periods of market uncertainty

We all need an emergency fund to protect our finances and cover those periods when sudden, unexpected expenses crop up. But a cash buffer is not only there to fix a broken boiler or to cover car repairs. It also has huge importance during periods of economic uncertainty, when financial markets are out of kilter.

It’s a good idea to have an emergency fund that can cover at least 6-12 months of regular spending. For those who have retired or are nearing retirement, an even bigger pot of up to two years of cash savings is generally recommended to cover essential expenditure.

Liquidity is vital in periods of financial turbulence as the cash reserves can be used to cover everyday expenses over the short term. It means investors avoid having to crystallise assets at the wrong time and can instead rely on cash to cover everyday living costs and any large, unexpected expenses. For retirees, or those nearing retirement, a cash buffer also offers the flexibility to pause or reduce pension withdrawals during market downturns, in turn helping to preserve the portfolio for the longer term.

3. Look at your tax-free ISA and pension allowances

Making sure your investments are as tax efficient as possible is fundamental as this protects your portfolio from the ravages of tax. Whether you are taking advantage of your tax-free £20,000 per tax year ISA allowance or your pensions Annual Allowance of up to £60,000 (or 100% of your earnings, whichever is lower), using a tax wrapper can shelter savings and investment from tax on income and capital gains. Keep in mind that tax treatment depends on your individual circumstances and may be subject to change in the future.

This is imperative now that the UK tax burden is estimated to be at the highest level since the Second World War and with most income tax thresholds on pause until at least 2028, people will get dragged into paying higher rates of tax as pay rises push people’s salaries either deeper into higher tax thresholds or see them paying tax for the first time.

In addition, with the annual allowance for tax-free dividends now just £500, the annual Capital Gains Tax exemption standing at £3,000 and CGT rates on share sales increased in the Autumn Budget – to 24% for higher rate taxpayers and 18% for basic rate taxpayers - holding investments within the confines of a tax-protected ISA could make sense, now more than ever.

The Personal Savings Allowance is another major consideration for savers. This has remained unchanged since 2016 when it was first introduced with basic rate taxpayers entitled to £1,000 tax-free cash interest on savings outside of ISAs. Taxpayers subject to the higher 40% income tax rate have a £500 allowance while additional rate taxpayers earning above £125,140 subject to 45% income tax, have no allowance at all.

Deciding whether to pay into an ISA or pension, such as a Self-Invested Personal Pension needs careful consideration. Money invested in either product can grow free of tax on income or gains, ideal for retirement saving, but pension saving comes with the added benefit of tax relief on contributions at the contributor’s marginal income tax rate. This effectively increases your basic rate tax band to reduce income tax whereas savings into an ISA are withdrawn from net income.

ISAs do not provide any upfront tax relief but there is no tax to pay on withdrawals which could make them better suited for financial goals with a slightly shorter timeframe as a pension cannot be accessed until an individual reaches the age of 55 or 57 from 2028. Tax may become payable on pension withdrawals during retirement where an individual’s retirement income – including state and private pensions - exceeds their annual tax-free Personal Allowance.

Pension or ISA: which is better?

4. Consider regular investing to remove the emotion from investing

Investing can get clouded by market noise, causing investors to second guess whether buying an asset at a certain point is the best decision, particularly when markets are topsy turvy. Waiting for a market downturn to deepen could cause investors to miss out on some of the best days in the markets. It also runs the risk of ‘analysis paralysis’ where investors put too much effort into assessing the right time to enter the market, delaying their entry by months or even years.

Investing on a regular basis, such as monthly, rather than timing a lump sum investment means an investor consistently invests regardless of whether markets are up or down – key when you consider how difficult it is to accurately predict short-term market movements.

This could be an effective way to manage any short-term turbulence in the financial markets. Investing every month takes advantage of pound-cost averaging, so rather than investing a lump sum at a single price point – such as during a supposed dip - investors can buy smaller amounts at regular intervals no matter what the price is at the time. This could help smooth out returns and reduce volatility over time.

Now could be a good buying opportunity for those who have several years left before they retire. If you can drip feed funds into the market through regular contributions, there is an opportunity to buy investments at a lower price point, something that could benefit your portfolio when markets recover. It’s important to note that the value of your investments and the income from them, may go down as well as up and you could get back less than you invested.

FAQ: How to set up regular saving with a Bestinvest account

5. Review your risk profile and set clear financial goals

Periodically reviewing your investments and your attitude to risk, whether once a year or more frequently, to consider what financial goal you are trying to hit and whether you have the right mix of investments to achieve that goal is a key part of any investment strategy.

Risk is unavoidable when investing, even among assets considered the safest, but investors should not ignore risk altogether. It’s about taking the appropriate level of risk for your circumstances, and one of the most important considerations can be an investor’s time horizon. For those planning to invest, it’s best to adopt a long-term approach and consider what you are investing for.

Remember, while your attitude to risk reflects the level of risk you’re willing to take when selecting investments to achieve a specific savings goal, your capacity for risk is also determined by how much money you can afford to lose without it having a detrimental impact on your standard of living.

Your capacity for risk will depend on factors such as how much money you have set aside to cover living costs, what other assets you have, how easy it is to access that money or those assets, your regular income, what outgoings and debts you have and how long you plan to invest for.

If someone has invested a large sum in a high-risk investment and the value falls, would they then have enough money to pay their household bills, such as rent or mortgage, and everyday living costs? If the answer is no, then it might be worth reconsidering what investments you choose and how you invest.

For a DIY investor that wants to review their risk profile themselves, one option is to fill in a risk assessment questionnaire. These typically only take a few minutes to answer and ask a series of behavioural finance questions to gauge an investor’s attitude towards risk. If you're a Bestinvest client, you can complete a risk questionnaire in the Coaching section of your online account.

When thinking about your attitude to risk, it’s important to consider not only how much money you are willing to lose but how much you can afford to lose. If a substantial loss on a particular investment would dramatically affect your living standards, then it might not be appropriate for you. However, if you have a long-term approach and are investing money that you can leave to ride out any financial storms along the way to give the investments time to grow, then you might be able to afford to take on a higher level of risk.

Another consideration is your emotional response. If you cannot bear to see your investments go down in value, something that may encourage you to panic and sell everything you own every time there is a market downturn, then you are likely to need low-risk options.

And if you’d rather seek guidance from a qualified financial planner to understand more about investing, Bestinvest offers free financial coaching whether you’re a client or not. The 45-minute session can help investors explore their tolerance for risk.

6. Diversify, diversify, diversify

While no one can predict how long any period of market volatility will last, buying into sharply moving markets can be a risky move as there is always the chance that markets will fall even further.

Ensuring your portfolio is fully diversified, not only across asset classes but also across different sectors and geographies, while also ensuring you’re taking the right risk level for the timescale you plan to invest for, is imperative. Ultimately, it isn’t only about the mix of equities, bonds, cash, funds and Investment Trusts that you hold in your portfolio but also other assets such as commodities, and property, in addition to your exposure to different markets across the globe and industry sectors, as well as fund styles.

DIY investors that want an active approach but want to remain hands off could also consider investing in a managed portfolio. At Bestinvest, we call these Ready-made portfolios. These off-the-shelf investment portfolios are built and managed by the experts at our parent company, Evelyn Partners. These diversified portfolios are tailored for different levels of risk with ongoing active monitoring – where a fund portfolio is selected, kept under review and rebalanced for you. It means rather than spending time and effort picking out the right mix of stocks, bonds and funds to build a coherent investment strategy, investors can rely on the expertise of an investment expert and let them do the heavy lifting when it comes to asset allocation. Of course, even though these portfolios are managed by experts, it’s still good practice to regularly review your investment’s performance and make any changes based on your financial goals and attitude to risk.

Explore our Ready-made Portfolio range

7. Stay optimistic

Market turbulence can be a worrying time for DIY investors, but investors can take some comfort from the ability of long-term markets to recover from short-term crises. While this is a challenging period for the markets, taking a long-term view and focusing on the fundamentals should ensure investors are well positioned for the future when markets recover again.