For many investors, stock market volatility is what keeps them awake at night. What if markets crash and their investments are worth half what they were before? How long would it take for them to recover? Would they have to put off their retirement? It may therefore seem strange to state that stock market volatility should be welcomed, as Richard Buxton, Head of UK Equities at Old Mutual Global Investors recently did.
From February 2016 to January 2018 markets went up fairly consistently despite political turbulence (including general elections in UK and Europe, Brexit and Trump’s controversial US presidency). In this situation investors can get into an ‘it’s going up because it’s going up’ mentality. Buxton points out the danger of a ‘melt-up’ in a rising market, where investors anxious not to miss out on rising values pile into the stock market and push up prices.
Although we didn’t get into ‘melt-up’ territory, in January 2018 markets experienced a ‘correction’, i.e. a fall in prices back down from slightly inflated levels. The chart below shows the rising value of the FTSE100 from 1 February 2016 to January 2018 and the correction.
The following chart shows in more detail the movements in the FTSE100 since January 2018, when the index fell from hovering around the 7600-7800 level to moving between around 6900 and 7300.
According to Buxton, a degree of fear is healthier in markets than complacency even though fear leads to volatility. Furthermore, volatility can be advantageous for active investors. Dips in the market may present buying opportunities – effectively the opportunity to pick up a bargain. Peaks may present selling opportunities, i.e. the chance to take profits from holdings that have performed well. The profits can then be reinvested at the next dip.
Most doctors do not follow the market on a daily basis and buy and sell individual shares. Instead, this is generally the job of professional fund managers such as Buxton. The point to note for doctors is not to watch the markets but rather to not be put off investing by market volatility. As Buxton notes, volatility is a normal and healthy characteristic in stock markets, and is in fact an environment in which an active fund manager can add value.
Note, however, that the volatility of the stock market means it is not a good home for money that may be needed in the short term as you risk having to sell during a market low. We suggest only investing in stocks and shares if you intend to leave your money invested for the long term, i.e. around five years plus. This should give the funds time to recover from any short term dips but please remember all investments can go down as well as up in value and positive returns are not guaranteed.
If you require personalised advice on investments please contact Richard Higgs CFP FPFS on 0117 966 5699 or firstname.lastname@example.org.