Recently, we have seen the return of stock market volatility in global markets. Naturally none of us likes to see the value of our investments fall, but in times like these it is important to look beyond the current ‘noise’ and focus on our long-term goals. Acumen explains why investing in stocks and shares is a matter of simply riding it out.
Difference between volatility and risk
One of the most common misunderstandings among private investors is to confuse volatility with risk. This lack of perspective can lead to an emotional resistance to equity investment and also a great deal of unnecessary stress. At its simplest, market volatility is a way of describing the degree by which share values fluctuate. In volatile periods, share prices swing sharply up and down, while in less volatile periods their performance is smoother and more predictable.
Risk, on the other hand, is the chance of selling your investments at a loss, and the main factor
that differentiates the two is your time horizon. Interpreting volatility as ‘risk’ is a misjudgement often caused by watching a stock portfolio too closely. In one sense, this is perfectly understandable; the stock market is a risky place to be in the short term and watching the value of your life savings jump around from day to day can be gut-churning.
Investing in stocks and shares is a long game
Investing in the stock market requires a long-term perspective. History shows that over periods of 10 years or more it is a very profitable place to be. Crucially, it almost always outperforms alternative investments, such as cash. For example, analysis of a balanced portfolio benchmark over the past 20 years shows that the best time to invest was in 1998, just two years before the tech bubble burst in March 2000 and shares plunged in value.
Even those that invested in 2000, literally just before the crash, would have seen their money
more than double in the years since, although it would have been an extremely volatile ride along
the way. Remember, in that time we have endured the recession from 2001, the market bottoming out in 2003 and the financial crisis of 2008/9, when markets were swinging up and down by four or five
per cent a day.
Market volatility can be a powerful force for good
Investors that took a short-term view may well have made a loss, but those that kept calm and stood firm have reaped the rewards. The key is to remember that, over the long-term, with remarkable consistency, share values have always bounced back – sometimes in big, rapid leaps. This demonstrates an equally important point: stock market volatility can be a powerful force for good because these wild swings work both ways.
For example, being out of the market for only the five best days during the past 20 years would have led to a 23% lower return. Missing the best 10 days would have reduced returns by a staggering 40%. So, while market volatility may be stressful, experience shows it is better to stay invested in bumpy times. Timing the market with such precision is impossible.
Rest assured our experienced investment partners are constantly monitoring the market and by far the most consistent message is that having a long enough time horizon, and not reacting emotionally to market movements, is key to success as an investor.
Contact Acumen today
The value of investments can fall and you may get back less than you invested. Past performance is not a guide to future performance. For more information, call 0151 520 4353 or email [email protected] to speak to an adviser.