As the late, great Douglas Adams wrote: “The Hitchhiker’s Guide to the Galaxy has outsold the Encyclopedia Galactica because it is slightly cheaper, and because it has the words “DON’T PANIC” in large, friendly letters on the cover.”
That is good advice in view of the recent stock market falls.
As you have no doubt noticed, the FTSE 100 recently fell more than 10% from its high in April this year, mostly due to the economic outlook for China. Some people call it a ‘correction’, but this is misleading.
It’s just a blip
When you look at long-term patterns, short, sharp declines of 5% to 25% are common.
According to data from Yale University, US stocks are trading at 24.9 times the average of their long-term, inflation-adjusted earnings, compared with 27 in February. Over the past 30 years, they have traded at an average of 23.8.
It only really matters if you are cashing in today. If you invested over the past six years, you have already enjoyed big gains. If you are continuing to invest, there is plenty of time to recover. If you are waiting for five, 10, 15 or more years, the rollercoaster continues.
If you like risk in real life (freefall parachuting, for example), you’ll like it in financial planning too. If you are really anxious, you might prefer safer investments such as cash – but be aware this means you will be settling for lower returns.
Consistency beats volatility
So who are the winners and the losers when the stock market falls?
Tucana’s Lance Baron says: “The winners are the patient investors who know they are in it for the long term. The losers are the investors that let their emotions rule, join the panic and sell their investments.”
You investments should be well diversified across cash, bonds, and stock markets around the world. That way, you can minimise the impact of any further decline.
We recommend you:
- Diversify more broadly to protect against the risk
- Remain focused on your long-term goals
- Take a deep breath and enjoy this blast from the past