Worried about volatile markets? Keep calm and carry on

Investing can be tough on the nerves. Flick over to any of the financial news channels and you will be swept up in the daily adrenaline-soaked highs and lows. Stocks and bonds can soar or crash, currencies fluctuate in value and commodity prices react to the prevailing economic conditions. It can occasionally feel like being strapped into a rollercoaster.

This volatility is present in most markets and for those with a short-term investing horizon, it can be beneficial. But how should those with a longer-term view deal with the frequent shocks and swings? One of the answers to that question comes through a well-known virtue – patience.

Predicting what the markets will do in the short term is notoriously difficult. The complex motivations of other investors are constantly changing and the news cycle relentlessly throws up fresh information. As a result, short-term investors find themselves wrestling with an opponent that is perpetually shifting its stance.

The investor that views markets through a short-term lens can also find their focus settling on the downturns. Look at some of the more well-known stock indices like the FTSE 100 or the S&P 500 and it’s the big dips you notice first. The bursting of the dotcom bubble, the global financial crisis and the spread of Covid-19 have all pushed asset prices south. But zoom out and take in the longer-term trend and a different, more positive picture emerges. There is a good argument to be made for cutting your losses in times of trouble. After all, risk appetites and priorities will always differ. But for those that can stay the course when things get rough, the rewards can be plentiful.

This vision of a long-term and patient investment strategy has been advocated by some of the financial world’s best-known investors. Berkshire Hathaway’s Warren Buffett and Vanguard founder, Jack Bogle, have both extolled the benefits of long-term investing. When the sages of the financial world speak, it’s normally advisable to listen and learn.

Choosing the long-term approach at the outset is straightforward, but sticking to it during a market downturn is understandably more difficult. Even professional investors can find dips tough to navigate when the emotion of the moment takes over. When markets start to fall, people panic. In the 2008 financial crisis, terrified investors offloaded billions in shares. At the height of the chaos, this seemed a natural response and there was lasting damage in some sectors. However, since then, major stock markets around the world have steadily recovered and investors who chose to sell missed out on the gains.

There is a story in the financial world that asset manager Fidelity Investments once conducted a study to find the best performing accounts on its books. So the tale goes, those who had done the best in the long term were surprisingly people who had forgotten about their accounts or had passed away. Their portfolios had supposedly not been swayed by short-term news stories or hot new investment ideas and were therefore allowed to climb uninterrupted. The validity of the story remains in dispute, but the message is one that is taken to be useful regardless. A long-term outlook is more beneficial than a short-term approach.

At W1M, we pride ourselves on helping our clients take a long-term view of their wealth so that it can stay secure and grow for future generations.