Investing in the Stock Market in Turbulent Times

As we have seen in recent weeks, stock markets, generally, on a global basis, go through periods of uncertainty and volatility. Until the Coronavirus crisis, the most recent large falls came in 2008 during the period dubbed as ‘the financial crash’. 

The sharp falls seen recently are clearly unsettling for investors. Some may be tempted to sell out of the market in an attempt to protect what they have. 

However, stock market volatility tends to be short lived and the general consensus amongst investment professionals is that doing nothing is the best approach during these times.

Selling or delaying making new investments when stock markets are volatile can be a dangerous and risky strategy. Known as ‘market timing’ this involves investing once markets have calmed down or buying when markets have gone even lower. 

Historically, sharp falls in the market have tended to be concentrated in short periods of time. Similarly, the biggest gains are often clustered together. As we have seen in recent weeks, large gains commonly follow a big fall or vice versa. The investor who tries to anticipate the best time for investing runs a high risk of missing the best gains which can have a major impact on long-term returns.

As an example, had an individual remained fully invested in the UK Stock Market over the past 15 years, their annualised return would have been 7.6%. Had that individual missed being invested in only the ten best days over that 15 year period, the annualised return falls dramatically to 3.3%. Missing the best 20 days would have resulted in a return of 0.8%*.

Our message is: look at the longer term picture, remember your financial goals and objectives and in the words of Corporal Jones ‘Don’t panic!’

*Source: Datastream based on the performance of the FTSE All-Share Index 31 Dec 2004 – 31 Dec 2019 with an initial lump sum investment of £1,000 with net income reinvested.