Volatile Markets

The markets all around the world have seen a sharp sell-off in recent weeks. At one point, the FTSE 100 was down around 10% on the past month before staging a recovery yesterday.

FTSE 100
(courtesy of Digital Look - click to enlarge)

Inevitably the media goes into predictable overdrive with warnings of crashes, and reminders of doom and carnage. For the average small investor, the combination of seeing your recently purchased portfolio of carefully selected investments lose 10% of their value in a matter of a couple of weeks together with media stories of more to come will create understandable anxiety.

Some newer entrants to the world of stocks & shares may have been lulled into a false sense of security over the past couple of years as the markets have been broadly rising and the wider economic news has been more positive. However, all investors know (or should know) that investments will rise and fall.

Anxiety can lead to uncertainty - as a species we are not very well equipped to deal with uncertainty, so I believe perhaps one solution to the problem of coming to terms with market volatility is to approach investing from a position of absolute certainty - markets will go up… and then go down. The other certainty is that no matter how far the markets fall, and then fall some more, in the long run they always bounce back.

The Income Investor

For me, the main reason for investing my money on the stockmarket is to secure a better inflation-proofed income than I could get from bonds and cash deposits. I don’t particularly relish market volatility but I am learning to take it in my stride a bit better than I did in the earlier years of my investing career.

For the day trader, share price/market volatility is where the action is and where quick profits are to be made (or lost!). For the income investor, falling markets will provide opportunities to secure a better yield but in general, so long as the dividends keep rolling in on a reasonably predictable basis and so long as those dividends keep increasing year-on-year a little ahead of inflation, I am happy.

The prices on my individual shares and investment trusts have mostly fallen by around 10% or so on average in recent weeks - some shares will have lost more than this, Hargreaves Lansdown, DS Smith for example. However, it looks as if my like-for-like projected dividend income for this year will have increased by around 8% compared to 2013. Of course, the current market volatility may continue for some time but at some point, maybe later this month/year, or sometime  next year, the markets will bounce back and normal service will be resumed.

Some media commentators equate volatility with risk. I think this is confusing two separate issues and tend to agree with Warren Buffett when he said “Risk comes from not knowing what you are doing”. This is not the same as the inevitable rise and fall of markets and share prices - it is what they do just as night follows day.

I read a piece in the Telegraph last week which ended with the words “Short-term volatility is the price that stock market investors pay for long-term out performance”. Not sure where the original quote comes from but just about sums it up for me.

Take it easy this weekend!