Last year, around this time, the FTSE 100 lost nearly 10% in 8 trading days in response to China’s crash — a dive that many saw coming, because when China sneezes, the rest of the world gets a head cold. While it recovered somewhat soon after, this kind of volatility is enough to shake even the most confident investors.
Granted, it’s not like current investors are unaccustomed to these kinds of occurrences; the last 15 years have been a wild ride, to say the least. From the bursting of the tech bubble to the 9/11 terrorist attacks, the crash of 2008 to what now appears to be the result of a slowing Chinese economy…it all sends shockwaves throughout the rest of the world, impacting our domestic market — and your individual portfolio.
So what can you and I do about massive volatility?
Two words: Asset Allocation. Sure, we have all heard that phrase before. But let’s look at a recent example of just how asset allocation allowed us to navigate the roughest market waters.
From January 1, 2000 to the end of 2009, we experienced what experts call “The Lost Decade.” By “lost,” we mean that the stock market (i.e., the FTSE 100) was essentially flat. If you started with £100,000 and invested solely in FTSE 100, your investment would have grown to £108,967.98 a full ten years later – an annualised return of just 0.86%pa.
However, as famed investing veteran Burton Malkiel pointed out in a Wall Street Journal article titled “Buy and Hold Still Works,” if you would have started with £100,000 and owned a well-diversified basket of low-cost index funds, rebalancing them just once per year, you would have grown your £100,000 to £155,253.28 during the same 10-year period. That’s an annualised return of 4.5% during what most called the Lost Decade.
So what is the key action to take during a period of volatility? Stay the course. Resist the temptation to turn and flee. Refuse to join the herd and make illogical decisions based on your emotions – and continue to make contributions to your Pension, ISA or other investment accounts. Consider this: When you continue those contributions in a down economy, you are essentially buying stocks at a discount!