It can be hard to ignore the noise when markets suffer short-term volatility but, over time, investors are usually well-rewarded for their patience.
Nervy investors can almost always find a reason to sell.
Until the recent market ructions, some investors were arguing that stocks were overvalued and that a correction was overdue. Since then, markets have dipped and volatility has spiked to levels not seen for several years. Inevitably, some investors have been tempted to sell on fears that the bull run is over.
But such investors are probably spending too long looking at short-term news. They may also be guilty of a common behavioural bias of over-confidence in their ability to sell stocks high and then buy them back when prices are depressed.
The problem with this approach is that using personal judgment to time the market correctly is almost impossible; successful timing tends to come down to luck. More fundamentally, it ignores the weight of evidence for how stock markets behave.
In the short term, stock markets can indeed fall suddenly, and often react unpredictably. That the recent correction was largely attributable to positive US economic news illustrates the point. Yet over the long term, stock markets behave far more predictably.
In fact, when you look at stock market returns over ten-year rolling periods, it’s clear that short-term dips have little impact on long-term gains. Research conducted by Barclays into the performance of UK equities over a period of more than 100 years, shows that the average annual real rate of return over ten-year rolling periods always came out positive. Moreover, equities outperformed cash in 91% of those periods.1
The fundamental question investors should ask themselves is, “Do I think the global economy will be bigger in ten years’ time?” If the answer is yes, then it makes sense to invest in it.
For those with a shorter time horizon, or who are unable to switch off from the noise, there is always a greater risk of crystallising the short-term losses that are an inherent feature of stock market investing.
For those willing to stay the course and keep in mind their longer-term goals, equities have an enviable record of delivering inflation-beating returns.
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Past performance is not indicative of future performance, and the value of your investment, as well as any income, may go down as well as up. You may get back less than you invested.
An investment in equities does not provide the security of capital assocaited with a deposit account with a bank or building society, as the value & income may fall as well as rise.
1 Barclays, Equity Gilt Study 2017
Member since: 14th February 2012
I am a Shropshire based financial adviser who helps my clients manage their finances as effectively as possible. I specialise in investments, retirement planning and Inheritance Tax Planning.