The recent market volatility is unsettling. However, history shows that in the long term markets do recover; the big question is - how long will it take? No one likes to see their investments go down, but periodically that is what happens. The reduction in values is only relevant if you need to raise cash from your investments now . Ups and downs are a necessary part of market behaviour.
It is also important to remember that historically falls in prices have provided very good buying opportunities for the longer term investor. It is extremely difficult to time the bottom of a market cycle, particularly because when recovery happens it quite often does so very quickly. For example, the last time markets hit a bottom was on 6th March 2009, and by the end of that month the FTSE All Share Index had risen by about 11%; one year later it was up by almost 60%.
Figures from Fidelity Investments (May 2011) highlight the fact that the longer term investor should not panic when markets fall. They show that, using the FTSE All Share Index as a measure, the compound return of an investment in the UK stockmarket over 15 years from April 1996, including the reinvestment of income, would have been 6.71% per annum; however, if that investor had missed the ten best days over that period the annual return would have reduced by more than half to 2.71%.
Fidelity make the following points, based on past performance (although that is not a guide to future performance):
- When stock markets become volatile, it is usually best to resist making changes to your long-term investment strategy
- It is too easy to miss the best gains when you try to time the stock market
- Time invested, not timing, is the key to investing