Tag Archive: Volatile Markets

  1. Volatile markets and a sunny economy

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    Although we have experienced a little volatility in recent weeks, the overall outlook for the economy looks pretty sunny, more than I can say for the weather outside my window! But hey, my wife keeps reminding me it’s February what do I expect! So the overall economic outlook should support equity prices for a while, particularly if investors take their hoards of cash they have on the sidelines and place it in the markets this year, with the recent pullback, there certainly seems to be a buying opportunity.

    However, as growth improves central banks (Bank of England, European Central Bank and Federal Reserve (US)) may find it difficult to raise interest rates (required to control growth/inflation) without sparking a recession in a couple of years’ time.

    Right now, I feel investors should be more concerned with political risks than macroeconomics and spend less time on monetary policy (inflation, interest rates, growth) and more on political issues such as the next election in the UK and globally or how hospitable will a Corbyn government be to capital.

    The increase of political risk is evidenced by the surge in populist parties from 7% in 2010 to 35% in 2016, this is a significant swing in support. What’s behind this swing? Inequality – we now have multiple economies running within the country and worldwide, which are vastly unequal. The elite are prospering and expanding at a rate of knots, whilst the bottom end of the population is still struggling to just get by.

    The automation of basic job roles makes the future look even worse; soon Amazon will be delivering your parcels using preprogrammed drones! It’s already opened a supermarket in Seattle, America with no checkouts!!

    We’re moving into an economy where the future career plans for our children, something I often think about for Olly (12) and Bella (11) is building, programming or servicing these AI robots!

    With a strong stock market, you need to ensure you are globally diversified and have exposure to the US and technology companies driving growth forward. The US is c. 51% of world market cap (i.e. The size of the US stock market is 51% of the overall world market value) therefore if you’re investing and have time on your side, make sure you exposure yourself globally to equities.  Diversify to reduce your risk with short-term high quality fixed interest and enjoy the ride!

  2. Remain calm in Volatile Markets

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    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!