Many investors are understandably feeling nervous and uncertain due to the recent sharp downturn in global stock markets. However unpleasant this may feel at the time, it is normal and is what we should expect from stock markets.
So what should you do when prices fall sharply?
- If you were planning to invest more, then continue with the plan. You will get the benefit longer term from buying at lower prices.
- If you weren’t planning to do anything, continue with the plan. Your patience will be rewarded.
- If you need money today, look across all of your assets and select those which have been impacted least from the recent price drops.
- Turn off the doom-mongers on TV, avoid short-term speculative commentary, and go and do fun things with your time instead!
At times like these, being patient and concentrating on your longer term financial goals is crucial to avoid making costly mistakes. Getting carried away by the short-term doom and gloom of investment markets is not conducive to a successful investment experience. Emotionally charged financial decisions are most likely to be poor ones.
As all investors understand, stock markets go up and stock markets go down. Experience proves to us that there are more good years in the stock market than bad but we have no way of knowing in what order the good years or bad years are going to occur. Sticking around for the long-term lessens the impact of the bad years and makes it more likely that you get the return you are owed for taking the risks associated with investing.
Less experienced and less disciplined investors can react to unsettling markets in an emotional way by selling “risky” assets when prices are down and then waiting for greater “certainty” to appear before buying back in. This could be a very expensive mistake.
Such “market-timing” strategies are fraught with danger. There is little or no evidence that forecast-based timing decisions work with any consistency. Even if you managed to get lucky by exiting the market at the right time, you still have to decide when to get back in, unless of course you think that keeping your money in cash is the best long-term solution.
Let’s remember 2008, the year of the global financial crisis and the worst single calendar year since 1974 for the UK stock market, which fell by 29.9%. The FTSE All Share Index rebounded by 30.1% in 2009 and a further 14.5% in 2010. If you had sold out on 31st December 2008, you would have missed out on these returns.
Based on the dramatic headlines over the last couple of weeks, you would be forgiven for thinking that we had just witnessed another fall like 2008. To reassure you, the FTSE All Share index is only down by 4.16% in 2015 and even the riskiest of our portfolios is down by less than this at -3.38% over the same period, despite having an allocation to Emerging Market Equities, including China (all figures based on returns from 31st December 2014 to 27th August 2015).
Markets are constantly adjusting to news. A fall in prices means investors are collectively demanding an additional return for the risk of owning shares. But, for you as an individual investor, the price decline only matters if you need the money today.
If your horizon is 5, 10, 15 or 20 years, the current uncertainty will soon fade and the markets will go on to focusing on something else. Ultimately what drives your return is how you spread your funds across different investment types, how much you invest over time and the power of compounding.
In the short-term, the greatest contribution you can make to your long-term wealth is exercising patience. And that’s where we come in. Let us do the worrying for you; we will soon be in touch if we think you should be making any changes.
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