Over the last few weeks we have seen stock markets decline quite rapidly before taking a breath and start to head back up.
I’m not going to go into the ins and outs of why this happened in this article. I will cover this in my new monthly market commentary coming soon.
What I do want to do is to provide some comfort to you by explaining that sharp temporary declines are perfectly normal behaviour from the stock market.
What stock market declines am I talking about?
Well since the start of October things have got a bit nasty for the UK and US stock markets. But the trend downwards has been seen across the world and much worse and longer for the more emerging economies like China.
The data below relates to the main stock market indices for each area. Stock market indices are a way of measuring the collective performance of the companies that list the stock market in the various countries indicated.
- At the start of October the UK FTSE 100 went down 6.8% in 7 working days.
- Over the course of October the US S&P 500 went down 9.7%.
- Since the start of the year the Hong Kong Hang Seng is down about 25.8%.
Stock market declines are not a time to panic
Here are some interesting insights:
- The stock market declines on average about 14% each year. That means from the highest point in the year to the lowest point in the year. Not a straight 14% decline in one go. But markets end up rising nearly 3 out of every 4 years.
- The stock market declines by 2% or more in a day, about 5 times every year.
- Over long periods, returns from the stock market significantly beat inflation.
- Trying to time the market is impossible.
Now, admittedly the data above relates to the US stock market in particular, but the trends are very similar elsewhere.
What can sometimes make the latest stock market declines appear more scary is when they follow a period of relative calm. We get used to the calm and think it is the new normal. Then bang, the temporary decline is back.
But actually the temporary stock market declines are what’s normal.
Think about your health.
Most of the time you go through life and your health is fine, but every now and then you suffer an issue and it sets you back. It may take time to recover but usually after treatment you are better off than you were.
This is the same as lots of areas of life.
- Your car running smoothly most of the time but every now and then needing to be fixed.
- You stay in the same job for a number of years and then get made redundant.
- Throwing a stone in a calm lake and causing ripples.
The point is that the ups and downs of investing, otherwise known as volatility, is the price you pay for long term success.
Remember the declines are temporary, the advance is permanent.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
