Don’t panic: How to keep your head in volatile stock markets

THE PAST month has been tough for financial markets. Despite strong economic performance in the UK and US, investors will have to get used to volatile markets, as growth in Europe and emerging markets continues to disappoint and the US Federal Reserve winds down its QE programme.  

 

September and October are typically bad months for markets. October has seen some of the worst returns for stock markets in history – including the Wall Street crash of 1929, Black Monday in 1987, and the worst of the credit crisis in 2008. 

 

Further, looking at the UK over the past 35 years, extreme monthly losses – of over 10 per cent – have typically happened in September and October. It’s unclear why this occurs, but it’s thought to be a purely psychological effect based on the coincidence of those worst market disasters being in the same month.

 

This year looks little different. Over the past four weeks, the FTSE 100 has declined by over 6 per cent. So is it time to panic? 

 

CORRECTION OR BEAR MARKET?

First, a correction is not always a warning of further losses. Since the crisis, the UK market has fallen by at least 8 per cent over a four-week period in every year. But with dividends included, the UK market has produced a positive return in each of those five years. A market correction does not preclude further upward progress. 

 

KEEP INVESTING

The age-old investment philosophy of holding firm and resisting the urge to bail out is always tested in times of high volatility. Historically, investors who drastically alter their strategy when the market is low don’t perform as well as those who hold firm. Research by Dalbar in the US shows that the average investor’s 10-year return is around one third of stock market returns over the same period. In effect, panicking could cost you dearly. Keeping a long-term view is key to riding out these bumps in the road. 

 

DIVERSIFY

For times like this, it’s important to be diversified. Own a portfolio of investments, not just one fund. Invest in overseas stocks as well as the UK, and consider other holdings such as bonds to reduce risk. While it can be tempting to invest more into a certain area when your investment is doing well, don’t fall into the trap of backing all your winners – identify the level of risk you’re comfortable with and stick with it. 

 

UNDERSTAND THE FEES

Costs are the only certainty in investing – whether the market is going up or down. It’s easy to be caught out by hidden charges, trading fees and commissions, so make sure you choose a provider that is completely transparent on fees. Know what you are paying and keep costs as low as possible.