After a couple of years of relatively smooth returns stockmarkets have recently become more volatile. There have been days with sharp downward movements that attracted lots of media attention. Should you be worried?
For investors with diversified portfolios and a medium to long term outlook, we don’t see any cause for alarm. Most of the recent volatility is just market ructions associated with adjusting to more normal conditions after a long period of low interest rates in the US.
We recommend the following approach for dealing with stockmarket volatility.
- Remain focused on the medium to long term and ignore the short term fluctuations. Obviously this is hard to do when most of the media is focused on a 24 hour news cycle rather than a multi year investment timeframe. But short term volatility inevitably dissipates. Medium to long term returns are far more stable and predictable.
- Bear in mind that history has shown short term market falls tend to be larger, but much less frequent, than short term market gains. Consequently falls tend to stand out more but they are ultimately outweighed by lots of smaller gains.
- Make sure you have sufficient diversification in your portfolio to smooth out volatility to a level you are comfortable with. Bonds and cash can be excellent shock absorbers for sharp downswings. Spreading stockmarket exposure across a variety of countries and industries is also important.
- If you have been advised to make regular ongoing investment contributions to a diversified portfolio, then market downswings are no reason to stop. You actually get more assets at cheaper prices in a downswing.
- Be wary of mainstream media finance reports. These are often distorted and sensationalised to spice up an otherwise dry topic.
A classic example in recent times has been “the largest one day points fall in history!”. This headline referred to a US Dow Jones 1000 point fall. While it may have been the largest fall in points terms, it came at a time when the index points value was near its all time high. In percentage terms it was nowhere near the largest fall in history. Percentage changes are what really matter for investors.
Similarly for any headline that says “Market loses X Billion!”. For an individual investor, a billion is obviously a huge, scary number. But as a percentage of a whole stockmarket, billions can be relatively small. When talking about worldwide markets in aggregate, the same applies for trillions. Media articles that say “Market loses X Billion!” are more intent on scaring than informing.
If you would like to discuss the impact of recent stockmarket volatility on your investments, please get in touch.