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BLOG: FTSE falls, how to keep your head

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05/02/2018
Investors have grown used to calm markets. Since the lows seen in the wake of the global financial crisis of 2008, markets have glided higher with very little volatility. That may be about to change.

The FTSE 100 has lost around 5% of its value in the past week, putting it back to levels last seen in late November. While this can hardly be called a crash, for investors who have grown used to steady returns, it is certainly surprising.

Market volatility is unnerving, but investors don’t get something for nothing, and it is an inevitable part of investing in stock markets. Markets can be bashed about by the latest economic report, or sentiment indicator and don’t always reflect reality. For an investor, it can be difficult to know when they really should panic, and when they should just sit tight.

There is an economic cost to panicking. Often the sharpest rises in the market follow the sharpest falls. Missing out on just a handful of the best days in markets can seriously dent your overall returns. Data from JP Morgan Asset Management shows that being out of the market on the 50 best days over the last 15 years would have seen investors lose 8.1% each year. Remaining fully invested would have given an annual gain of 5.9%.

Rather than avoiding stock market investment, it may be better to learn to manage the volatility associated with it. If you go with the herd, you could end up selling out when markets are low and buying in when they are high – not a recipe for long-term success. At the same time, pulling money in and out of markets can often add trading costs.

That said, investors should review their holdings from time to time. Stock market valuations can become stretched and while there is no immediate catalyst for a sell-off, it can be worth trying to re-orientate a portfolio towards areas of the market that look better value. However, investors need to try and distinguish between this and ‘noise’, and ensure that any adjustments they make are well-considered.

Regular savings are one of the best ways to mitigate market volatility. If an investor saves a regular amount each month, it means they are buying it at different price points. This helps smooth returns over time and means investors are not at risk of buying in at the top of the market.

It is also worth remembering that volatility creates opportunities. It can be the equivalent of the January sales for investors, but many don’t see it like that and try to sell out at a lower price, rather than thinking about what they might buy. Periods of volatility bring an opportunity to invest more cheaply.

The main message? Don’t panic because markets have dropped a little. The economic environment is changing from one of low interest rates and deflation, to one of higher interest rates and inflation, and that’s bound to cause a few ructions. Think long-term and don’t panic.

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