Batten down the hatches…

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Markets fall but avoid the temptation to cash out.

It’s fair to say that stock markets have been relatively volatile over the last few weeks. Since peaking at just over 7,100 in April of this year, the FTSE 100 Index dropped as low as 5,900 in August, before rattling around between 6,000 and 6,200. For the FTSE 100 see also Dow Jones in the U.S., the Nikkei in Japan, Dax in Germany and most other global indices. The reasons are clear.

China, the world’s second largest economy and driver of so much of the global growth experienced in recent years, is emitting signs of weakness. Projected growth in GDP is being revised downwards. Manufacturing output is slowing. Domestic and export demand for Chinese produce is dwindling and Chinese demand for raw materials and commodities is doing the same. The result? Investors are spooked, hence the volatility being demonstrated on the trading floors around the world.

However, it’s not all bad news. The U.S., UK, Eurozone, Japan and India are all showing signs of growth and the uncorrelated fall in regional stock markets could prove a valuable opportunity for fund managers to strengthen their portfolios and increase gains when current market trends reverse.

At times like this, more than any other, it pays to remember that your ISAs, pensions and bonds are invested for the long-term. Their value might fall in the short term but, unless you are approaching the point where you are planning to exit the markets entirely, the chances are that this will not have a long-term effect on you. Cashing out when the markets are down only serves to crystallise losses which could take years to get back.

Of course, there are scenarios where cashing out is unavoidable. If you’re retiring soon and want to buy an annuity, for example, you’re going to have to come out of the market to pay your annuity provider. We would manage events like this well in advance, with a gradual de-risking of the pension fund so as to dampen the impact of market falls. Only a sudden and unexpected need for a significant amount of cash would result in an unplanned exit from the market.

For the rest of us, we need to appreciate the value in battening down the hatches and weathering the storm. Of course, if that storm turns out to be more like climate change, then a different approach will be required. In the meantime, stay indoors and wait until it passes…

A small boat riding the large wave of the stock market fall

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