It seems everywhere I look in the last few weeks I see pictures of stressed traders and a mass of red on trading screens. Newspapers and online headlines read ‘Market Crash’. Naturally, I have received several calls from concerned clients. They want to know: what they should do, how it will affect them, and is the sky falling in on their retirement plans?
First, it is common for these things to happen over the summer months. This is for a number of reasons: low trading volumes result in relatively small trades having a larger than normal impact on the market increasing volatility; the media have little to report (August is known as the ‘Silly Season’ in UK media circles) which means minor stories take centre stage and the same news gets repeated more often resulting in greater impact than normal. And don’t forget Mr. Market from Dr Graham’s famous book on investment ‘The Intelligent Investor’ published more than 50 years ago it is just as relevant now as then. Mr Market completely forgets why he invested in the first place. When he sees markets go down he just follows the herd. Consequently, when markets go down all the Mr. Markets out there make it go down further. For the ‘Intelligent’ investor says Graham this is an opportunity. The Market is offering the ‘Intelligent’ investor an opportunity to buy investments at last year’s prices; an opportunity most would welcome in any buying scenario.
So is the market turbulence all good news? No, of course not. But it must be kept in context. The markets and to a greater extent the media generate a huge amount of ‘white noise’ and it is hard to know what to ignore and what to take seriously. Few private individuals in full time employment have the time and resources to manage their own investment portfolio. Instead they employ a qualified, experienced professional. In conjunction with their investment adviser they put an investment plan in place which is designed to meet their goals within their specific circumstances. These plans tend to be over the very long term perhaps 10 or more years.
Investment advisers are not only useful at the outset of an investor’s financial planning. Having a third party available helps investors in times of higher than usual market volatility. They help investors remember they are investing for the long term and offer a professional view of the situation. Additionally, when adjustments are needed they are on hand to act as a guide.
Part of any investment plan should be the management of risk. For example, a young person saving for retirement can afford to take greater risk than an older person who has already built up a significant amount of capital and is with a few years of retirement. The degree of risk is reduced as the investor’s goal is approached. This then reduces the impact of market fluctuations such as the one’s we have seen recently.
It is also important to recognise that the media generally focus on just one of the traditional asset classes: equities or shares. Whilst this is an important part of many portfolios, most will also include investment in cash, fixed income and property. These assets react differently to equity markets. This diversification is a fundamental way of reducing risk in a portfolio.
The message is if your portfolio is correctly structured to suit your needs you shouldn’t panic and you should keep focused on the long term. On the other hand, if you are at all concerned about your portfolio you should contact a professional adviser.
As always, if you have any questions or comments please let me know.