So you had a bad day, as the song goes. The Brexit vote has reminded investors that the stock market is not for the faint of heart – but nor is it for the impulsive or impatient. It’s time to take a step back and examine the EU Referendum’s lessons for investors.
‘Rollercoaster ride’ is a horrid cliché, but for a lot of investors the early hours of 24 June must have felt exactly like that: a sickeningly steep plunge into the unknown. The FTSE 100 graph of that morning resembled (aptly enough) the white cliffs of Dover, with one of the most sheer drops in equity prices for years. For a few moments, it looked like 2008: The Sequel.
‘Rollercoaster ride’… a sickeningly steep plunge into the unknown.
And then, a levelling off, a catching of breath, and the market began, hesitantly at first, to climb again. In hindsight it was the kind of movement that’s been seen on the markets hundreds of times before; the only difference is, this time the whole world was watching. So if you were one of those whose stomach flipped over when you saw the FTSE that morning, here are some things to bear in mind for the future.
What moves share prices up and down?
Firstly, remember that stocks react to two very different sets of influences. One of these is geopolitical events – such as the EU Referendum. Such events affect investor mood one way or the other, with optimism triggering a rise and vice versa. These dramatic mood-swings can prove very damaging (or beneficial) in the short term, but they are not to be relied upon – since they are both unpredictable and very much a two-edged sword.
The other main influence on share prices is of course the performance of the companies themselves. These reflect the fundamentals of a company such as profits, balance sheet strength, returns on investments and cashflow. Such moves tend to be much gentler in both directions (unless the company has had a sudden and major change of fortunes) but are more dependable over the long term.
Therefore, the choice of stocks in your portfolio is key to its performance over time. If you know your underlying investments are strong, a spot of bad weather shouldn’t cause you undue concern.
Why you shouldn’t try to ‘time the market’
Secondly, remember that a stock market dip is only a theoretical loss. It only becomes a real loss of money if you sell the shares. Therefore you need to ask yourself if a loss of value today has any impact on your long-term investment goals. If you weren’t originally planning to trade the shares in soon, it makes no sense to sell them in panic when they are losing value – the smart thing to do is hold your nerve and wait for the tide to lift again.
Short-term market swings are so unpredictable that reacting to them is often futile. If you stop-start an investment, you can end up suffering the losses without then benefiting from subsequent gains. It is often the case that the best-performing days can follow soon after the worst ones (this was seen in the FTSE 100 in the week after the vote, as it bounced back to above its pre-Referendum levels).
Research from Fidelity International indicates that if an investor had missed the 10 best days on the market over the past 30 years, it would have reduced the cumulative return on their money from 1,168 per cent to just 572 per cent. This equates to a difference of nearly £6,000 on an initial £1,000 investment.
The shadow of Brexit: how to approach equity investing
It would be a mistake to assume that the fallout from Brexit is behind us and that the market is ‘over it’. The true effect of the UK leaving the EU will not be fully known or felt for some time, especially as the process itself is likely to take several years. However, this timescale will allow for investors and their advisers to judge the new shape of the market and adjust investment strategies accordingly. It should be noted that the FTSE 250 (which comprises more UK companies) did not see a bounce-back on the scale of the FTSE 100. Though it did recover some of its initial losses, the Brexit vote appears to have made a longer-term dent in the FTSE 250.
A financial adviser can help you find the balance of risk and reward to suit your needs.
Karen Barrett, chief executive of Unbiased, comments, ‘Recent events will have reminded investors that putting money into equities is a long-haul journey, in which short-term volatility should be seen as just bumps in the road. We have also had a vivid demonstration that equities are high-risk. If you have money in the stock market and have found the recent downs and ups stressful, then you should perhaps consider rethinking your financial strategy to suit your risk appetite. It may be that you need to restructure assets so that you are not exposed to such high levels of risk. A financial adviser can help you find the balance of risk and reward to suit your needs.’
This article was first published by unbiased on the 6th July 2016.