October has been a rotten month for global stock markets. The FTSE 100 closed at 6,939 yesterday having peaked at 7,877 on 22/5/18 – a decline of 11.9%, although this does not take into account dividends. The S&P 500, a more representative stock market index of the US economy than the Dow Jones peaked at 2,929 on 24/9/18 and closed yesterday at 2,705, down 7.6% whilst the German DAX has fallen from its January 2018 high by 17.4%. Emerging markets have fallen further by around 25%.
The cause of the stock market falls has been attributed to rising US interest rates and US Treasury yields, trade wars, the Italian bond market, Brexit and more latterly disappointing earnings from US technology companies. I suspect investors worried about the bull market being long in the tooth are reacting, perhaps over-reacting to any bad economic news or data. However whether the “correction” (defined as a 10% fall) or bear market (a 20% fall) is the harbinger of a more serious crash or global recession is too early to say. What we know is that 2018 has proved to be much more volatile than 2017, which was a very benign period for stock prices. The bear has woken from its hibernation.
So how should investors react? Most of my clients take these events in their stride although I have had a couple of worried clients contact me about declining investment valuations. My advice is to stay invested and ride the waves. Valuations may look bleak but they are paper figures unless investments are crystallised. Selling out of fear turns paper losses into real ones and it is the worst thing investors can do. This is why it is axiomatic to hold sufficient cash to prevent forced selling of equities at terrible prices during market crashes. Cash is the insurance that permits investment for the long term. All the evidence suggest this delivers the best results. I have been an IFA for 26 years now and I have clients with investments they have held for 10, 15 or 20 years. One of the benefits of experience is I can assess the outcomes. In all cases these are highly favourable and reflect the fact that in the long term equities deliver excellent profits for buy and hold investors. Many academic studies support this. I remember a few years ago reviewing a client portfolio. Over a 20-21 year period a holding in a European equity fund had risen from £3,000 to £21,000. The client had held the fund through thick and thin, the technology bubble bursting in the early noughties, the great financial crisis of 2008 and 2009 and more latterly the Greek debt crisis, and she certainly reaped the results. Stock markets typically recover and continue their upward trend in subsequent years. There are very few examples of stock markets remaining in the doldrums for the long term.
Having this perspective is more difficult for clients who have been invested for a short period of time. This is because profit levels are especially sensitive to price fluctuations. Downward movements of markets frequently mean in the early days clients who have just invested go into the red i.e. the value of their portfolios are less than the amounts invested. For long term investors stock market crashes dent profits but rarely wipe them out, so it doesn’t feel as bad.
There is an old adage that says, it is time in the market that counts, not timing the market. The latter is notoriously difficult to do. It is all very well and good if you can buy in at the bottom of the market and a V shaped recovery follows but not so if equities continue to slide after you have invested. However there is a case for tactical investment at times like this to buy in selectively at relatively low prices. Whilst you do not know the direction of markets post investment you can be sure you got better prices than had you invested at an earlier peak. Recently for a few clients I have advised tactical investment of cash hanging around in ISAs and pensions doing nothing and I am aware that some fund managers have used the market falls to add to their best stocks. Fund managers would not be buyers if they thought the market falls represented a systemic threat. Time will tell if they are correct.
The content of this blog is intended for general commentary only and is based on my understanding of stock markets. Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.