The Great Fall of China
Well what a week we have just witnessed. Global investment markets went into a panic on Monday after China experienced its worst day of trading since 2007 with the main stock market, the Shanghai Index, falling by around 8.5% Elsewhere oil prices were reaching a six and a half year low of around $38 a barrel and worldwide stock markets “enjoyed” a pretty sharp correction.
As uncertainty and panic set in the FTSE 100 share index, of Britain’s leading shares, dropped by £74 billion ( 4.7% or 289 points ) it’s biggest daily drop since 2007.
So should we thinking to sell, sell and sell? Probably not. Because on Tuesday the worldwide markets bounced back. The FTSE 100 in London closed up 3.09% at 6081 while in Europe both the indexes in Paris and Germany rose by around 4% at the close of trading.
As I collect my thoughts today at lunchtime, 12 o clock on Friday, the FTSE 100 now sits at around 6182 points a further recovery on the week.
So what have we learned this week?
Well first of all yes markets can go down as well as up and they will react to any shocks or uncertainty. Just like all of us they just don’t like uncertainty and when common sense comes into play, and everything is not as bad as it first seems, they will settle down and return to some kind of normality.
Diversification is very important. We often hear about not putting “all our eggs in the one basket” Smart investors don’t put all of their eggs in one basket. They diversify. I’ve no doubt that many investors portfolios will be invested in equities, which will have fallen in value on Monday, but they will also be invested in the other main investment asset classes; fixed interest securities, property, even some cash. Ignoring equities for a moment, what did the value of the gilts and investment grade corporate bonds do on Monday? They rose, right? I wonder why the national tabloids and news programmes did not report that?
How Comfortable are you with Risk?
The most important reminder this week is that your investment portfolio should always meet your current attitude to risk, it should basically match the risk that you are willing to take for the reward that you are hoping to achieve. With this comes awareness, and understanding, of how bumpy the journey could be, especially over a short period of time, when worldwide events like Monday happen again in the future, as they will.
Are you in this for the long term?
Successful investors don’t worry about the short-term, because they know investing is a long-term strategy. The success or otherwise of an investment strategy is measured in years, not months, and certainly not in days or hours. Just consider how is the performance of your investment portfolio looking over the past three, five or ten years?
Do you have enough cash in reserve?
Any financial planner will tell you it is fundamental to have emergency funds and cash for shorter-term needs before you consider investing. Successful investors can afford to keep their portfolios invested during a market recovery and subsequent recovery because they keep enough in cash to cover short-term needs. This is especially relevant for pension investors using drawdown, where enough cash should be in place to avoid the need for selling investments in the short term.
When is loss a loss ?
Investment losses only become real losses when you crystallise them. Selling cheap and buying expensive sounds like the complete opposite of how successful investors act.
By reminding ourselves of this simple investment philosophy, and by letting professional fund managers manage the risk, it will allow you to relax and enjoy the longer term benefits of what investments can do, and thus helping you to achieve any future financial goals that you may have.
Callum Yorke is an Independent Financial Adviser at Goldstone Wealth Management with around 30 years of experience within the financial sector.