The overall direction of developed stock markets is a relentless and continual rise in value over the very long term, punctuated by falls. It’s important not to let global uncertainties affect your financial planning for the years ahead. Individuals who stop their investment planning, particularly during market downturns, can often miss out on opportunities to invest at lower prices.
It’s important to stick to your strategy and keep moving ahead consistently by spreading risk and growing your wealth. It’s volatility in stock markets that make investors nervous. However, not all volatility is bad: without volatility, stock prices would never rise.
Higher inflation and faster interest rate rises
At the time of writing, UK inflation fell to 2.5% from 3% in the previous month and below market expectations of 2.8%. Markets had reacted to the signs of faster wage growth and a strengthening US economy that may lead to higher inflation and faster interest rate rises. The global sell-off began following a solid US jobs report that fueled expectations that the Federal Reserve would need to raise interest rates faster than expected because of the strength of the economy. That concern prompted the pullback from stocks. The Bank of England seemed to offer support suggesting “a gradual pace and to a limited extent” for the view that rates in general are on an upward path with a strengthening UK economy. Trade wars and US politics aside, this is a generally positive background for equity markets.
Investors should focus on long-term horizons
Everyone’s investment goals are different. By deciding on your long-term financial priorities – whether it’s funding your children’s education or saving enough to be able to retire early – you can avoid being blown off course by short-term events.
Trying to second-guess the impact of events such as Brexit or the recent stock market correction – or even attempting to make a bet on them – rarely pays off. Instead, investors who focus on long-term horizons – at least five to ten years – have historically fared much better. Sensible diversification such as; owning a mix of assets, including shares, bonds and alternative investment e.g. property, can help protect investors over the long term. When one area of a portfolio under performs, another part should provide important protection and it’s never too early or too late to start taking this considered and strategic approach.
Media frenzy
Volatility, risk and market declines are a normal part of the investing cycle, but the media likes drama. Reports will use words that make these market fluctuations sound alarming, so be cautious about reacting to the unnerving 24/7 news cycle.
What you need to consider
- Stay strategic: If you have a well-diversified portfolio, then it’s more important than ever to stay the course. You have a strategy in place that reflects your risk tolerance and timeline, so stay committed. However, if you reacted and sold in a previous market decline or have not implemented a strategic asset allocation, then now is the time to have a discussion about your investment options.
- Stay calm: Be aware of the psychological affect this type of volatility has on you as an investor and resist the urge to be reactive. The recent decline was expected and is coming after financial markets as a whole have experienced a historic bull phase for close to ten years now.
- Stay focused: No one knows how severe any market turbulence will be or what the market will do next. It could be over quickly or linger for a while. But no matter what lies ahead, proper diversification and perseverance over the long term are what’s most important.
There are many ways that you can invest, and while we all want our money to grow, it’s important to think about the level of risk you might be willing to take with your hard-earned money. It’s about achieving a good balance. To discuss your future investment objectives or review your current portfolio, please contact our Independent Financial Advisors using the contact tabs on the right hand side of this page.
