The recent steep falls in equity markets have panicked many investors. Concern has now cooled but it’s the reaction to those fears that we need to be aware of.
Equity markets have always historically had periods of calm, strong bull runs, bouts of volatility, and negative periods and in the absence of prolonged bear markets, as far as they have gone down they have and in a total return context come back up reasonably quickly.
That is not to say we should not try to avoid those falls where we can. But if valuations are not over-stretched and economic fundamentals remain supportive, these moves are sentiment driven and so when fundamentals reassert themselves, and sentiment changes, markets recover. This makes these types of market moves potential opportunities for investors rooted in fundamentals and valuation.
Equally, I’m not advocating that every investor should put all of their money in the stock market; there are well researched merits to diversification across different asset classes which pay off across cycles.
However, I do believe that we should bear in mind the importance of time horizon and if investors are panicked by bouts of volatility like this they should not over react and sell. Historically these kinds of sell offs, while they are sharp and painful in the short term, should be viewed through the lens of longer term investment objectives.”