stock market

Stock market fluctuations: Keeping the declines in context

The Stock market declines have once again made headlines.

The FTSE 100 fell for a second day on Thursday 11th October, taking its shares more than 10% below their peak in May; the definition of a market correction. Reflecting market wide turbulence, it’s understandable if the fall has prompted a sense of uneasiness where your investments are concerned.

But this shouldn’t be the case.

“All equity market declines are temporary and eventually give way to resumption of the permanent advance.  Permanent loss in a well-diversified portfolio is always a human achievement of which the market itself is incapable.” Source: Nick Murray

If you’re tempted to act on the current volatility and accompanying sensationalist headlines with a knee-jerk reaction; it’s time to take a step back.  A calm, balanced approach that looks at the dips in context is needed.

Investing should form part of your long-term financial plan. And if your goals and aspirations have remained unchanged, the current stock market fluctuations should have little bearing on that. A glance at the historical data of stock markets will show you that shares falling is simply part of the process.

Rarely, if ever, should you let short-term stock market volatility drive your decisions behind a long-term financial plan. We know that it can be tempting when your investment value has decreased to panic and take your money out. But seldom is that the best course of action.

At times when the stock market declines, it’s important to remember the fundamental principles of investing:

  1. Over the long-term, investors have enjoyed attractive real returns from the stock markets. With interest rates low, savings accounts have delivered a real-term loss for many years now, in contrast.
  2. Volatility is to be expected occasionally. There are a whole host of factors that can lead to falling prices, even when economies are strong, but prices will typically bounce back almost as quickly as they fell.
  3. Trying to time the market is near impossible. Looking for the optimal moment to invest and withdraw your capital is highly unlikely to yield the results you want. Instead, long-term investment is the answer.

Now is the time for clear thinking and sticking to your chosen course. Deviating from your long-term financial plan because of a temporary fluctuation in the stock market isn’t something any financial planner should be recommending.

So, with this in mind, how should you be reacting to the current stock market turbulence?

In short, you shouldn’t.