Significant market falls: should you be worried?

Image of a newspaper reporting on market view

Investing

Gareth Trainor

22nd September 2015 at 2:00pm

First things first, what’s happened?

Recently the Chinese government has attempted to stimulate the economy by devaluing its currency (the renminbi) and suspending trading on many stocks. All this has done is spook markets, both in China and globally, with significant falls in global stock markets, including the S&P in the US and the FTSE. How negatively? Well, on 24 August, the day many in the media are calling Black Monday, the Chinese market was down by 8%, UK markets fell by over 4.5%, and the US by over 3.5%*.

And on 22 September, the FTSE 100 Index again fell below 6,000.

The falls need to be looked at in context of the overall picture, however. For instance the FTSE 100 Index had broken its all-time high earlier this year.

“Although current headlines are focusing on the decline in the Chinese stock market and the knock-on impact on other global investments, we have not changed our long-term view on markets or the global economic outlook”

Should you be worried?

In simple terms, no you probably shouldn’t be. Why? Well, most of us are investing over the long term, and significant market falls happen periodically.

Generally, the wrong thing to do when markets fall by a reasonable margin is to panic and sell out of the market – this just locks in a loss. The right thing to do is remember why you’re invested in the first place and make sure that rationale hasn’t changed.

Professional investors aren’t filled with panic at the moment, regardless of the situation the media is portraying. Most of them are viewing this as a ‘market correction’ – just bringing things that have got a little inflated back down to earth.

Here’s what Standard Life Investments has to say about the current situation:

“Although current headlines are focusing on the decline in the Chinese stock market and the knock-on impact on other global investments, we have not changed our long-term view on markets or the global economic outlook.

We are mindful of the current fluctuations in markets and the impact this may have on customers’ investments. But we remain cautiously optimistic on the outlook for equity and property markets, supported by an improvement generally in company profits.

We particularly favour European and Japanese equities – regions where there are signs of economic recovery, central banks are easing monetary policy and the banking systems are now healthier.

In the US, we feel that company earnings are less positive. Meanwhile, we are still maintaining a certain level of investment in the UK, developed Asian countries and emerging markets.

As always, we will continue to monitor events carefully and make adjustments to our investment views as and when needed.”

Standard Life Investments’ head of global equities, Mikhail Zverev, has also called this “a buying opportunity, not a market inflection”.

In other words, this reduction in the value of some investments is an opportunity to pick up a bargain and benefit when the value rises again.

So what should you do?

That depends on your investments. If you’ve picked a ‘hands off’ investment where someone is making all the decisions for you, then you should be fine. Just make sure they can invest in lots of different types of investments across different countries and you should be very well diversified.

If, however, you’ve selected your own funds or investments, you’ll probably want to make sure your choices still meet your needs. Again, revisit your original investment rationale. Why did you pick the various countries or asset classes in the first place? Are you invested in a diversified portfolio, or did you deliberately take a riskier single asset class or geographical approach?

You might want to get some commentary from fund managers who are significant in the markets you invest in, and balance those against the outlooks of fund managers who manage significant multi-asset funds.

If you do decide to make changes to your investments, make sure they’re for the right reasons. Don’t react out of panic. And, if possible, take a long-term view.

If you have any questions or concerns, post your comments below. We’ll continue to keep an eye on what’s happening in the markets, and update you if anything changes.

*Google Finance, www.marketwatch.com

This blog and any responses to comments are not financial advice.

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