With markets once again fluctuating wildly, I thought another reminder of the wisdom of not responding to short-term headlines and market gyrations might be useful.
Investors tend to see short-term volatility as the enemy and this can tempt many people to try and move money out of the market and “sit on the sidelines” until things “calm down.” Although this approach may appear to solve one problem, it creates several others:
- When do you get back in? You must make two correct decisions back-to-back; when to get out and when to get back in.
- By going to the sidelines you may be missing a potential rebound. This is not historically unprecedented; see chart below.
- By going to the sidelines you could be not only missing a potential rebound, but all the potential growth on that money going forward.
I believe the wiser course of action is to review your investment objectives and decide if any action is indeed necessary. This placates the natural desire to “do something”, but helps keep emotions in check. Short-term needs should nearly always be met from cash and longer-term needs can be planned for in advance; funds can be withdrawn when conditions are more favourable.
The following charts show the Intra-Year Declines (the furthest the market dropped during each discrete year) vs Calendar Year Returns (the return an investor would have received by staying invested for the whole of that year), for the FTSE 100 Index and the S&P 500 Index since 1984.
The charts clearly show that, in most cases, investors who did not react to short-term volatility were rewarded for their patience and courage.
As always, if you have any concerns about your own investments, please do not hesitate to call me.
With kind regards,
Graham Ponting CFP Chartered MCSI