What to Do When Stockmarkets Are falling

OK.  Global stockmarkets are falling.  And investors have an understandable impulse to do something.  Anything.

These are, after all, our life savings on the line.  But here’s the thing.  Investing is for the long term.  Savings are for short term stuff.  So unless anything has changed in your life, nothing has changed.  It’s madness to scrap an investment strategy because the market is volatile.  Fact is, stockmarkets don’t only go up.  They go down as well.  That’s in the nature of the game.  It’s payback for what you’re going to get when you hold your nerve.  With investing, patience really is a virtue.

Here’s five good reasons why:

1.      Equities historically massively outperform cash

Take a look at this graph.  This shows the UK stockmarket performance over the last 20 years (blue line) compared to cash (red line).  Take note of the ‘blip’ at the end of 1987.

That was the ’87 crash.  Where more than 30% was wiped off world stockmarkets literally overnight.  A year or two later, the markets recovered.  20 years later, it looks like nothing happened.

 2.      You’re probably not only invested in equities

Chances are you’re invested in a diverse portfolio with equities, property, some element of fixed interest or absolute returns.  It’s rare that all these asset classes fall at the same time. This generally forms a sort of cushion against a hard landing

3.      ‘Time in’ not ‘timing’ is the key to investing

The sharpest falls and largest gains are often concentrated into short periods of time.  If you try to avoid the falls, you’ll risk missing out on the gains.  Take a look at this chart:

 4.      Time reduces risk

Nobody knows where the markets will go next – though many claim to.  Nothing about the last few weeks has changed the fundamentals.

Historically, equities and bonds have outperformed cash.  And the longer you’re in the game, the better the outperformance.

The price for that outperformance is coping with volatility.  And if you can’t stand the heat you shouldn’t be in the kitchen.  But that might mean you’ll go hungry

5.      What’s the alternative?

The only truly ‘safe’ investment is cash.  But cash pays very little interest, and in recent times, you’ve been earning less than inflation, which means you’re losing the buying power of your money.

It’s generally not a good idea to keep a very close eye on long term investments – it will only agitate you.  Better to take a deep breath, get yourself a glass or three of wine, and take another look at the equities versus cash graph above.

Remember there is nothing abnormal about what is going on here.  Stockmarkets do go down as well as up.  The only time that matters is when you sell at the bottom.

Julie Wilson
Julie Wilson
Julie, a Chartered Financial Planner, is a Director and Practice Manager at PenLife Associates Ltd, Chartered Financial Planners in York. Julie is a Fellow of the Personal Finance Society – the highest professional qualification available in the UK – and has a degree in Financial Planning. Julie is also accredited to ISO 22222 – the internationally recognised kite mark for professional Financial Advisors.

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