It does not seem that long ago that the global markets crashed during the early days of the coronavirus pandemic. In March 2020 in fact, they reached a low point, and it was important at that time not to panic - despite screaming headlines trying to persuade you otherwise.
Investments in general had fallen in line with the markets at that point, but the recovery from the downturn was immense. The MSCI World Index (for example) reached its low on 16 March 2020, when it had dropped about 20% from the start of the year. Selling at that point would have locked-in heavy losses, however, if you had remained invested, you would have seen the index return nearly 44% from that point to the end of 2020.
Since that impressive recovery, we have seen a marked increase in market volatility, and there have been further ups and downs.
Most people should invest for the long-term, and in doing so, they can take advantage of the general upward trend of the market. Although there will always be blips along the way, stock markets will usually see an upward trend in the long-run.
This is illustrated by the below graph showing the FTSE 100 over time. There are clearly drops along the way, but the overall trend is still very much an upwards one:
What has happened this year?
The start of 2022 saw big falls in both equities and bonds. This was initially due to inflationary pressures, and this was then exasperated by Russia’s invasion of Ukraine. Supply chain issues, commodity prices, and the energy crisis all then combined to what you might call a ‘perfect storm’, causing most asset-classes to fall.
There was a rally in July and August, though recent events have brought more tough times for financial markets. Last week, the UK government delivered a ‘mini-budget’, comprising of big tax cuts and reversals, and a further increase in government borrowing. This created another bout of volatility in the markets, and the pound spiralled down to a record low against the US dollar.
The currency dropped again after a warning from the International Monetary Fund (IMF). The worry is that the sweeping tax cuts are not fully funded, and the city is concerned that the policy may turn out to be ‘anti-growth’. It is worth mentioning that these most recent issues are UK specific, and this again emphases the benefits of a globally diverse portfolio. Ironically, such currency issues can help some companies, as weak Sterling means that UK companies with assets denominated in other currencies (most of the FTSE 100), can potentially benefit from increased returns.
Investments have had a choppy ride during 2022, and it is likely that we will see volatility for the remainder of the year, at least. At times such as these, when financial markets are headline news and everything you hear seems to be doom and gloom, it can be very worrying. It is important to keep a level head, and not to panic. Selling your investments in a period of uncertainty is very rarely a good idea. Panic selling will lock in losses, and you will miss out on any recovery.
At Lovewell Blake Financial Planning, we make the point that investing should be for the long-term, and if you are in it for the long haul (generally 5 years or more), then you should not be majorly concerned. Of course, if you are withdrawing money from your portfolio, or you are nearing retirement, then it would be prudent to review your strategy.
Market volatility is part and parcel of investing, and there will always be an element of uncertainty. Large falls happen every so often, but once the issues that caused them are resolved, markets usually recover fairly quickly. That said, there are no guarantees, but nonetheless it is important not to make any kneejerk decisions.
Trying to ‘time the market’ is extremely difficult, and if you are inclined to do this, you will generally come off worse. In short, it’s usually better to stay invested throughout. One reason that this is near impossible is that the best trading days are typically very close to the worst trading days.
You can see this from the below chart (produced by Vanguard Asset Management Limited), and this also illustrates that many of the worst trading days on the US markets, occurred during years in which the total final return was positive. Predicting when to exit and when to re-enter the market, is therefore fraught with difficulty and risk.
Past performance is no guarantee of future investment returns.
If you Invest with a long-term view, this should mean avoiding the temptation to try to time the market. It is impossible to do this consistently, even the professionals cannot do it, and you could find you miss some of the best market days if you do. This can have a massive implication on your long-term returns.
Lovewell Blake Financial Planning Limited have designed their Centralised Investment Proposition on making sure client investments are diverse across a wide range of sectors and assets classes, which is widely known to reduce risk. Diversification (not putting all your eggs in one basket) and having a long-term strategic approach has proven itself consistently through the years. Over the long-run, bouts of high inflation, bull, and bear markets, and plummeting currency have been absorbed by such outlooks.
Of course, it is only human to worry about your investments during volatile times, and everyone will have their own set of aims, objectives, and risk tolerance. It is important that your strategy reflects these. Investing is not for everyone either – therefore, it is important to seek professional financial advice if you are considering this.
Lovewell Blake Financial Planning Limited can help you to formulate an investment strategy, fully diversified in line with your attitude to risk, aims and objectives. If you are concerned about your investments, or your level of risk you should contact Lovewell Blake Financial Planning Limited. Our experts are based across multiple offices in East Anglia, including Norwich, Lowestoft, Bury St Edmunds and Great Yarmouth and many more.
In short, the message is to be aware, but not to panic during these volatile times.