Today was a bad day for the value of company shares around the world, with the S&P 500 in the US falling by almost 5%.
Closer to home, the FTSE 100 index of leading UK company shares closed 191.37 points lower at 5,393.14 – a fall of 3.43% in a single day.
The eurozone debt crisis and fears of a double-dip recession in the US are driving investor sentiment.
Investors are worried that Italy and Spain will be the next European economies to default, with the viability of a bailout for these much larger economies more challenging than it was for Greece.
What matters now to investors?
The first thing to remember when stock markets are falling sharply is that most investors, certainly the vast majority of Informed Choice clients, do not have portfolios invested wholly in UK or global stockmarkets.
One of the ten points in our investment philosophy explains how diversification using mainstream asset classes like this can reduce risk without destroying returns.
Most investment portfolios are invested in a mix of cash, fixed interest securities, equities and property. Modern Portfolio Theory explains how blending together different asset classes can result in risk reduction for investors
This means that dramatic falls in stock market levels are rarely replicated in the fall in the value of diversified investment portfolios. They are still likely to be travelling in a downwards direction, but to nowhere near the same extent.
Secondly, investment is an activity for the long-term. What we have witnessed to date this week amounts to very short-term activity.
With most investors aiming to fulfil a financial objective in five, ten or twenty years time (or even longer than this), the short-term volatility experienced by global stock markets has very little impact on long-term results.
When investment markets are behaving irrationally, as they are currently, it is worth remembering the wise words spoken by investment sage Warren Buffett.
When referring to the wisdom (or more accurately lack of wisdom) associated with trying to time investment markets, Buffett said:
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”
The decision to be ‘greedy’ when markets have fallen sharply must always relate to financial goals, capacity for loss and attitude towards investment risk.
If over the next few days you are in any way worried about how investment markets are behaving or the impact of these events on your own portfolio, please do pick up the phone to your Financial Planner at Informed Choice.
When the global financial crisis hit stock markets in 2008, one of the things that differentiated us from many of our peers was our willingness to continue reviewing portfolios, meeting with our clients and answering the sometimes difficult questions.
At this time, it is impossible to say whether the events of the past few days will turn out to be anywhere near as bad as the global financial crisis of the late 2000’s. If it is or if it isn’t, our approach will remain the same.
We will remain accessible, willing to answer questions and provide reassurance when it is needed.
We believe this is what matters now when it comes to how global equity markets are behaving. Our blog will of course remain updated as further events unfold.
Photo credit: Flickr/fsse8info
