Market falls test investors’ mettle

Emma-Lou Montgomery
Emma-Lou Montgomery
Fidelity Personal Investing6 February 2018

The biggest one day fall in the history of the Dow Jones has sent shockwaves through world stock markets.

When Wall Street sneezes, everyone catches a cold, or so the saying goes and that has certainly played out so far.

The FTSE 100 index of leading shares fell 159 points, or 2.2% at the open, to 7,109, the day after the Dow Jones index fell 1,175 points; its biggest one-day points fall in history. The broader S&P 500 fell 4.1%.

Elsewhere the situation was similar. In Asia, Japan's Nikkei 225 closed 4.7% lower and Hong Kong's Hang Seng was down 5.1%. While closer to home, Germany's DAX 30 opened 2.9% lower and France's CAC 40 slumped 2.8%.

The sharp fall in the US markets have undoubtedly sent shockwaves around the investment world, but what exactly has triggered this global meltdown?

Most likely and somewhat ironically, it would seem there’s a sense that we’ve had it too good for too long. The catalyst was Friday’s US jobs figures, which showed wages growing faster than expected. This raised the possibility of higher US inflation and interest rates on safe assets, which by default suggests less value in risky ones.

Self-fulfilling prophecy?

The question is whether the economic outlook in the US and around the world has really changed, and enough to justify weaker financial prices. Or whether the correction has come about because of good old market sentiment - the feeling, this time around, that prices have got too high.

On the face of it the FTSE 100 does appear to have been on a seemingly unstoppable upward trajectory - and often in the face of anticipated falls. So much so, that we haven’t witnessed a fall of more than 3% for 15 months.

Over in the US the Dow has experienced an even more bullish run. Not content with ending 2017 25% higher overall, it was back up to a new record high just 12 days ago, after the latest round of corporate earnings.

Experience suggests that the bull run has to come to an end at some point. The good times have run for long now that the feeling is that prices were getting over-heated and it’s almost as though the pressure of ‘will they, won’t they’ have got too much and the bubble has been - possibly - forcibly burst.

What great investors know and the rest of us have to remember is that volatility is part and parcel of investing. Markets rise and they fall. That’s the norm. The ups and downs that take place are the price we pay for the out-performance we’re all looking for.

And, looking at this from another perspective, you could argue that the dramatic falls we are experiencing today are no more dramatic than the record rises we have seen since the end of November. It’s just that the pain of losing that causes investors to panic and sell, is even more pronounced and certainly more instinctive than the greed that drives people to invest in things they really shouldn’t bother with.

Now is the time to hold your nerve. And stay invested.

Timing the markets and second-guessing the best time to buy and sell is a fool’s game. Experience shows time and again that the tenets of successful investing remain the same - whether markets are heading up or down at any one time.

1. Remain invested 

Investors who remain invested tend to benefit from the long-term upward trend.

2. Seize opportunity  

Corrections and even market falls provide opportunities.

3. Keep going 

Drip-feeding money into the market on a regular basis takes away the stress of worrying about whether to wait and buy later or whether to buy more now when prices look cheap.

4. Show your mettle  

As Peter Lynch, the former Fidelity investment guru, put it: “Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.”

Warren Buffett takes just as forthright a view. He once said: “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”

5. Focus on the future

Just as today we’ve seen falls tomorrow (metaphorically-speaking) we’ll see the bulls back out.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.