Monday 24 August 2015

Stockmarket Jitters?

In my previous post last week, I was celebrating 2.5 yrs for my blog. During that time, the markets have mainly risen without a great deal of turbulence. They say the markets can climb a wall of worry and the crash comes out of a clear blue sky.

The dramatic falls over recent days have been more of a correction after a good run of market gains. Everyone who invests should be prepared for such events - indeed, everyone who decides to invest some of their hard-earned cash will no doubt be aware intellectually that markets can go down as well as up - it is part and parcel of the process of investing. The markets do not go up in steady straight lines but zig and zag in the most unpredictable ways.

Earlier this year the FTSE 100 reached its all-time high of over 7,100. At the time of posting it is 5,900 - a fall of ~17% in the past 4 months. However it has fallen over 10% in less than 2 weeks.

For some reason, investors get jittery when the markets fall sharply. In a recent post on the sort of combinations needed to be successful, I mentioned the possibility of making poor decisions during periods of volatility - I should know as I have made plenty in the past.

Part of this process stems from paying too much attention to scary media headlines - "World Markets in Turmoil"! or "Biggest one-day Fall for 10 years - whats going on"! combined with the fact that our portfolio losses hurt much more than the pleasure experienced from stock market gains.

There may well be many investors who may have started investing over the past year or two and will not have experienced such turbulence and volatility. They will possibly start with the best of intentions to buy and hold for the long term but are now stung by losses of 10% or 15% in just the past week and who may well be thinking of cutting losses and selling up.

The Plan

Without a sound investing plan, its easy to get blown away by volatile markets. Of course, whilst it will help to have a good plan from the beginning, no one can know how they will react emotionally to a sharp sell-off in global markets until they actually experience the raw feelings that such a climate of fear can bring about.

Perhaps now is a good time to re-evaluate the plan and to see whether it is still going to keep you in the game and get you where you want to be in 10 or 20 years time.

My personal plans and strategy have been revised earlier this year and I am so glad to have made the move away from individual shares.

I know with my shares portfolio that even in the relatively calm waters of the past couple of years, the volatility and share price movement was becoming a little too much for my personal comfort zone. This has been one of the factors which brought about a change of strategy and a move towards the diversified LifeStrategy60 index fund.

Like everyone else, I have no idea where the markets are heading next but the current sell-off does not feel anything like the turmoil of late 2008 and early 2009 - more like a sharp 10% or so correction which is likely to happen every 4 or 5 yrs.

So, it almost goes without saying that the plan or investing strategy needs to be able to accommodate the sort of volatility we are seeing at present. We are all different personalities and react to events in different ways. Some people will be able to ride out the current downturn with little problem and will possibly be looking to pick up some bargains. Others will be worrying and wondering whether their decision to invest on the stock market was such a wise move as they see the value of their portfolio decline day by day.

There is obviously no one plan or strategy offering the best solution in all situations for all investors. The markets offer the probability of a much better return than bonds or cash deposits over the longer periods. Therefore, the “best” strategy for you is the one that you can stick with in good times and bad.

Keep calm and focus on the long term goal. Short-term volatility is the price that investors pay for long-term outperformance.

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