Stock market volatility: Keep calm, and carry on

It’s inevitable that periodically, stock markets around the world will experience spells of volatility.

The financial press will undoubtedly report the billions ‘wiped off’ the value of pensions and investments, conveniently ignoring the fact that volatility is inevitable and in many respects should be welcomed. It’s your reaction alone which dictates the effect on your financial future.

Change your perspective

The latest example occurred earlier this year.

The FTSE 100 Index fell to its lowest level since April 2017, while worldwide stock markets headed in the same direction. Ironically, the reason was unexpectedly positive economic news, which prompted fears of a spike in inflation and subsequent rises in interest rates.

The ensuing headlines will have done nothing to calm a nervous investor’s blood pressure. However, if volatility is viewed correctly, at worst it should be seen as insignificant and at best as an opportunity.  As Warren Buffet said: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

If you found yourself feeling nervous when you turned on the television, logged in to social media or picked up a newspaper, perhaps it’s time to change your perspective. Instead of using up emotional energy worrying about the inevitably volatile nature of the markets, or worse making investment decisions based on short term fluctuations, we recommend taking a step back, observing the bigger picture, taking a calm and considered approach and remembering that once the moment has passed, short-term stock market volatility is almost always of no consequence in the longer term.

Remember the fundamental principles of investing

It’s vital that investors remember the fundamental principles of investing:

• Over the long term, investors have enjoyed attractive real returns from the world’s stock markets. That’s not something we’ve not been able to say about deposit accounts for many years, which currently guarantee a real-terms loss with interest rates below the level of inflation.

• Volatility is to be expected from time to time. In fact it’s inevitable, even when the world’s economies are fundamentally strong as they currently are.

• Trying to time the market (looking for the optimal moment to invest or withdraw capital) is proven to be almost impossible. To be successful you need to get two decisions right; it’s far better to spend time in the market, rather than trying to time the market.

Think long-term

To put it another way, rarely, if ever, should short-term stock market volatility cause you to divert from your long-term financial plan or strategy. Especially if your goals and aspirations remain unchanged.

During periods of volatility, calm heads and clear thinking is called for, with a focus on the long term. Deviating from your chosen course is not what any financial adviser or planner should be recommending.

However, it’s only natural that you may have some concerns, if you do then please speak to your dedicated Partner.

In the meantime, stay calm, stand back from the panic-inducing headlines, and remember the fundamental principles of investing. We’ll leave you with the wise words of Mr Buffett: “During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”

The value of your investment can go down as well as up and you may not get back the full amount invested.

Stock market investments do not include the same security of capital which is afforded with a deposit account.