As I write this, global stock markets are suffering huge volatility. The FTSE 100 has dropped to its lowest levels since April 2017 and the Dow Jones has suffered its biggest fall since 2011.
Suddenly the press has gone into overdrive. I have heard the news refer to the stock market as ‘plunging’, ‘crashing’ and ‘wiping billions off the world’s richest’. However, it’s important to understand what this means for you and what (if anything) you should be doing about it.
The stock market has proven itself to be a fantastic growth medium; however, it’s important to note that risk and return are linked. You cannot get a return without taking risk. This manifests itself in swings between capital loss and capital growth. It would be great if you could participate in the growth and avoid the losses but this just isn’t possible. This latest sell off was caused by the US economy looking stronger than expected, and the fear that; as a result, interest rates would rise. In other words, a strong economy has caused the stock market to ‘plunge’. I’m not sure anyone saw that coming…
But none of that helps with what you should do now. The simple answer to that question is… nothing. Any losses you have suffered have already happened and we have no idea whether the stock market will rise or fall tomorrow. However, history tells us that any decline is temporary. Over the long term, capital markets will find a way to make money for investors.
Our approach towards investing means setting our clients portfolios up to only take the amount of risk they need to take. The exposure to the capital markets is fulfilled through a low cost, globally diversified portfolio. This is offset through exposure to defensive assets and cash to dampen the effects of market volatility. The result is a portfolio that is designed to deliver the return their financial plan needs over the long-term. There is no need to take the added risk of trying to time jumping in and out of the market. After all, this has been proven to be impossible to judge with any accuracy.
Coupled with this we ensure our clients retain enough cash to mean that they shouldn’t need money from their portfolios at short notice. This should avoid the requirement to cash in an investment when the market has dropped.
Our clients are generally investing to deliver the life they want to live. this means they have an investment timeframe of 30+ years. Over such a long length of time, this period of uncertainty will be seen as a blip; not the world ending catastrophe that the press would have you believe!
This market volatility, although scary, is completely normal. In the normal cycle the stock market will rise and fall as investor sentiment changes. The key is to manage your behaviour accordingly; and that is exactly what a good adviser should help you with.