From the Covid pandemic and war in Ukraine to Donald Trump’s return to the White House, the 2020s have brought economic challenges and geopolitical unrest.
In the last few weeks, events in the Middle East have cost lives and threatened market turbulence and rising energy prices. The situation is fast-moving, with markets reacting to claims, counterclaims, and shifting deadlines.
This can be worrying as an investor, but it’s important to remember that market volatility has happened before. In fact, it’s an inherent part of investing and history has some lessons to share about what generally happens next, and why avoiding panic is key.
Here are just five of those lessons.
1. Significant market volatility is more common than you might think
Stock markets rise and fall daily – this is one of the main reasons why we recommend only investing over the long term. Doing so helps to smooth the effect of these fluctuations and gives your invested wealth the chance to recover if a large fall occurs. What’s more, significant drops might happen more often than you imagine.
Data from Schroders found that market drops of 10% or more occurred during 30 of the last 52 calendar years to January 2024. During that same period, drops of 20% occurred 13 times, or roughly once every six years.
Source: Schroders
The figures relate to the MSCI World Index, which has seen strong average annual returns over that period, although, of course, past performance is no guarantee of future performance.
2. Cashing out during downturns has historically been a mistake
When markets fall, it can be easy to react quickly and emotionally. But these knee-jerk decisions could simply turn a paper loss into a real one, with significant long-term opportunity costs too.
We know that falls occur often, but that markets generally recover. Withdrawing funds when prices fall means receiving a poor return on your stock and relinquishing the chance to see gains when markets begin to rise again.
Schroders‘ figures help to illustrate this point too. If you had reacted emotionally and moved your investments to cash back in 1929, when prices fell by 25% at the start of the Great Depression, you wouldn’t have broken even again until 1963. This is nearly 20 years after you’d have broken even had you stayed invested.
Likewise, a move to cash after the first 25% fall during the 2008 financial crisis would mean your funds were still invested at a loss today.
A move to cash lowers your potential for investment returns. But you’re lessening the potential impact of compound growth too – essentially growth on growth. Over time, the interest you receive on your returns-plus-interest can add up. Cashing out lowers the value of your invested fund and lessens the compounding effect.
3. Markets generally grow over the long term
A quick look at some of the leading indices over the last few decades will show you that the trend of markets has been upwards.
Source: London Stock Exchange
Source: CNBC
Above are the FTSE 100 since 1986 and the MSCI World Index since 1981. As you can see, despite market dips coinciding with, among other things, the 2008 global financial crisis and the 2020 Covid pandemic, the long-term trend is undeniably upward.
Patience, a level head, and a focus on your long-term goals should help you stay invested through periods of upheaval so that your wealth can grow in line with rising markets.
4. Diversification can help manage volatility
Investing is a balance of risk and reward, and understanding your risk profile and capacity for loss is crucial before you part with your hard-earned money. Once you know the level of risk you are willing to take, diversification is a key way to spread that risk.
Investing all your money in one asset class, sector, or geographical region (or even in a single company) means that your money is vulnerable to a drop in that area. In the last few years, the so-called “Magnificent Seven” of US tech companies has made headlines and generally performed strongly. More recently, huge AI spending and concerns of a bubble have slowed performance.
By spreading your investments across sectors and regions, it is hoped that a potential fall in one area will be offset by a rise in another.
5. Speaking to a financial planner can help
At Stonegate, our team of financial professionals has decades of experience dealing with the markets. This means we’re best placed to provide reassurance and help you to stay calm when external factors cause volatility and threaten your wealth.
While past performance is no guarantee of future performance, we know that markets trend upwards and that it’s time in the market, not timing the market, that is key.
Get in touch
If you are worried about the effects of short-term market volatility in your investment portfolio, we’re on hand to offer reassurance and a helping hand. Get in touch. Email admin@stonegatewealth.co.uk or call us on 01785 876222.
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