What to do when stock markets become more volatile…?
In August 2024, the equity markets experienced notable volatility, driven by a confluence of global economic factors and geopolitical tensions. This period serves as a poignant reminder of the inherent fluctuations in financial markets and the emotions they can evoke among investors. Despite the short-term turbulence, maintaining a long-term investment strategy remains paramount for achieving financial goals and capitalising on market growth over time.
The volatility in August was largely driven by ongoing geopolitical conflicts, trade disputes, and fluctuating economic indicators such as inflation concerns and mixed growth figures, and exacerbated by negative sentiment in the news headlines. These factors led to rapid swings in stock prices as investors reacted to the uncertainty. However from the previous S&P 500 peak in mid-July to the 5th August low, when that index fell 8.5%, the index has almost recovered all of the short term loss.
During periods of heightened volatility, investors frequently grapple with the impulse to react swiftly to market movements. Emotional responses, such as fear and panic, can drive hasty decisions like selling off investments to avoid potential losses. However, history has shown that such reactive behaviour can often lead to missing out on subsequent recoveries and long-term gains.
Understanding the nature of equity investments is key to navigating market turbulence. While stocks are generally more volatile than other asset classes, like bonds, they have historically offered higher returns over time. Staying invested through market cycles allows investors to benefit from compound returns, where earnings generate further returns, leading to exponential growth. This highlights the importance of patience and persistence in investment decisions.
Market timing, or attempting to predict when to buy or sell based on short-term price movements, is notoriously difficult and often unsuccessful. Even experienced investors struggle to consistently outperform the market through timing alone. Research suggests that missing just a few of the best-performing days in the market can significantly reduce overall returns, reinforcing the value of staying invested.
Diversification is another essential strategy for managing risk during volatile periods. By spreading investments across different asset classes, industries, and geographic regions, investors can reduce the impact of downturns in any single area of the market. This approach helps to cushion portfolios against market shocks and enhances long-term resilience.
In addition, having a tailored investment plan is crucial for managing emotional stress during periods of heightened volatility. A personalised strategy, aligned with individual financial goals, risk tolerance, and time horizon, provides a clear roadmap for decision-making. This helps investors stay focused on their long-term objectives and resist the urge to make impulsive changes in response to short-term market fluctuations. By maintaining a disciplined approach and regularly reviewing investment portfolios, investors can navigate market volatility with greater confidence and ultimately achieve their financial goals.
While the equity market volatility in August 2024 may have been unsettling for less seasoned investors or those without a financial plan, this market fluctuation was short lived. There will be times in the future when investment markets have prolonged periods of flat or negative returns, which is to be expected over the longer-term cycle for markets, and it is key to maintain a long-term investment strategy, embrace diversification, and adhere to a personalised investment plan to weathering such periods and capitalising on the market's long-term potential.