Global financial markets are experiencing a summer storm. Stock prices have fallen sharply around the world, particularly in Japan, which has seen its biggest one-day fall since the “Black Monday” crash of 1987.

The Vix volatility index, which is widely seen as a gauge of how fearful US investors are, shot up to 50 points compared with 16 points a week earlier. That’s the highest level it has been at since the start of the COVID-19 pandemic in 2020 and suggests the tumult may not be over yet.

As is the case with every market downturn, we can never be sure what the precise reasons behind it are, but there are probably several. The biggest factor, it’s widely agreed, is the worsening economic outlook in the world’s largest economy, the United States.

The US jobs report for July, released last Friday, showed that the unemployment rate has risen to 4.3%, the highest it has been since October 2021. It’s the fourth consecutive month of rising unemployment, and the announcement has raised concerns about a possible economic slowdown. Goldman Sachs said at the weekend it now believed there is a one-in-four chance of the US falling into recession over the next 12 months.

Times such as these can be very testing for investors. Nobody likes to see the value of their investments fall. Media headlines and predictions of more doom and gloom invariably add to the anxiety investors are feeling. But it’s really important, when volatility strikes, that we take a step back and put things in perspective.

Here are seven things you need to bear in mind.

 

1. It’s natural to feel anxious

If you’re apprehensive about recent volatility, remember that it’s perfectly natural. That’s how our brains have evolved over tens of thousands of years. Perceived threats trigger the “fight-or-flight” response, preparing us for immediate action. Our bodies release stress hormones like adrenaline and cortisol. Remember, it’s not just you — all investors are affected to some degree or other.

 

2. Uncertainty is unavoidable

There will always be uncertainty in the global stock markets; it’s part and parcel of equity investing. If it weren’t for uncertainty, we couldn’t expect a premium for investing in stocks at all. But, historically, markets have rewarded patient investors. Just think about some of the events that have rocked the markets in recent years — the pandemic, the Russian invasion of Ukraine, spiking inflation and so on. Each time the outlook appeared bleak, but the markets recovered and went on to reach new heights.

 

3. Taking action usually makes things worse

Human beings have an inbuilt bias towards action. When the unexpected happens, investors often feel they should be doing something, if only to relieve any emotional discomfort they may be feeling. But if, for example, you reduce your equity exposure after markets have already fallen, you’re simply turning paper losses into actual losses. Almost invariably, the best course of action in these situations is inaction.

 

4. Trying to time the market is futile

It’s very tempting when the markets turn volatile to engage in market timing. We can all be seduced by the idea of using short-term strategies to avoid short-term pain without missing out on long-term gains. But research shows us, again and again, that it’s almost impossible to do consistently, and the negative impact of timing mistakes tend to far outweigh any perceived benefits.

 

5. The best days often follow the worst

Something else investors fail to realize is that markets sometimes recover remarkably quickly after a sharp downtown. For example, the Japanese stock market fell 12.4% on Monday, but then rose 9.3% on Tuesday. Investors who bailed out before the market closed on Monday were taught a very painful lesson. Missing out on just a few of the best days for market returns during your investment career can drastically reduce your eventual returns.

 

6. Recession is not a catastrophe

Of course, nobody enjoys an economic recession, especially those who lose their jobs. We don’t know yet whether the US, or the rest of the world, will actually enter a recession. But even if that does happen, the implications for investors are not as dire as you might be thinking. For a start, markets tend to fall in advance of a recession, so the markets have already factored in the possibility that there will indeed be one. Also, in the past, markets have generally performed well in the years immediately after a recession.

 

7. Diversification is your buddy

There is no escaping market risk. Every now and again, the whole market is affected by a sudden change in investor sentiment. You can, however, substantially reduce your overall risk by diversifying broadly. In particular, diversification can reduce the potential pain caused by the poor performance of a single company, industry or country. As the Nobel laureate Merton Miller famously used to say, “Diversification is your buddy.”

 

Investing is easier with a plan

None of this is intended to downplay any discomfort you may be feeling. Again, it’s human nature to feel uneasy when markets head southwards.

If you really have struggled emotionally in recent days, or you’re worried that you may have to postpone your retirement, you should see it as a warning that you need to be better prepared for next time.

Investing is so much easier when you have a long-term plan that you can stick with. That means sitting down with a financial planner and identifying what you really want to do with the rest of your life. You can then work out, between you, how much money you’re going to need, and what steps you have to take to ensure you don’t run out of money.

Don’t keep putting these crucially important decisions off. Life is short, and we only have one crack at it. Why not contact us so we can make an appointment and start getting you on track?

 

 

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Financial Planner in Norwich

rockwealth Norwich is an evidence-based and fee-only Financial Planning firm situated in the City of Norwich, Norfolk.

About: rockwealth Norwich IFA, is based in the centre of Norwich. As an independent financial planning adviser, we can help with many financial services, from independent financial advice, pension and retirement advice, investment advice and inheritance tax planning.

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