Wednesday 2 October was a pretty bad one for markets, due to fears of a global economic slowdown- the FTSE 100 saw its worst day since January 2016, in Europe the German Dax closed 2.8% lower, France’s CAC 40 lost over 2%, and the Dow Jones ended down 1.9%, its second day in a row closing over 1% lower.
Market movements like this can be catastrophic for those who choose to speculate and attempt to beat the markets.
The below chart shows what an investment of £100 into the FTSE all-share 55 years ago would look like, given 3 different scenarios.
Scenario A is the Orange line. This investor manages to exit and enter the market in such a way that he misses the 10 WORST days. The current value of his £100 would be £97,664.
Scenario B is the Grey line. This investor gets it wrong and misses the 10 BEST days. The current value of his £100 would be £22,492.
And in Scenario C the investor just leaves it alone and has a current value of £41,782.
Whilst scenario A would be ideal, it is an impossibility. The reality is that no one can predict the future and speculating on the markets rarely pays off in the long run. But one thing is always true, the markets recover. One-off, unexpected shocks tend to be just that – one-offs that don’t impact companies’ ability to carry on trading. News, as far as stock markets are concerned, is often just noise that causes temporary nerves, and people start selling. Hence, prices start falling due to lack of demand for the shares in uncertain times, not companies’ prospective profits.
Below is the S&P 500 since 1927 with some key events highlighted.
Pearl Harbour saw a drop of 7.6% in the S&P 500 on the Monday and Tuesday following the attack. The time to recover was exacerbated by the progress of the war in Europe.
The Cuban Missile Crisis saw the world on the brink of a nuclear war – the blockade covered a two-week period, but the S&P fell and recovered in a week.
JFK’s assassination saw the market fall almost 3%, and the exchange suspended. The weekend followed, and the market was closed for his funeral on the Monday. On Tuesday it recovered all of its losses and more.
So as usual, keep calm and carry on.
But what if you need the money and the markets are down?
Making sure your portfolio matches your risk profile is the most important thing to do. As you come closer to the time where you are going to need access to your savings, start rebalancing your portfolio to lower its exposure to volatile assets. Make sure you are in regular contact with your adviser and keep them informed of your plans.