Last week was an interesting week in the world of finance, with the headlines full of words like crisis, crash and turmoil. While these are the kind of words that might grab a reader’s attention, as well as make them worry, they’re representative of a snapshot in time, without any of the greater context that would put the situation into perspective.
One way to think about it would be to compare it to your blood sugar. Let’s say we gave you a box of Krispy Kremes. That’s right. A whole box. And then we force you to eat them all. Every last delicious crumb. And then we measure your blood sugar levels. What do you think we would get? A crazy, off-the-chart blood sugar level! Your body is in crisis! It’s a meltdown! You are more or less diabetic!
If we based medical decisions on that one tiny piece of data from that one test, we’re going to be seriously barking up the wrong tree with our diagnosis. Much better would be to monitor your blood sugar over a longer period – a week, a month, even a year – so we could see the bigger picture and look at the patterns.
Normal market moves
And so it is with the Stock Markets around the world. What we’re currently seeing is not particularly unusual. If you invest over a long period of time, you will be certain to encounter the kind of market moves we’ve been experiencing – even if they might seem violent in the moment. Right now, we’re not concerned by these short term moves, as our investment time horizon is a long one, and we’re confident that our portfolios are focused in the right investment areas: we have negligible exposure to commodities, and our emerging markets exposure is largely focused on consumer staples. Indeed, the events that triggered the dip in global markets have been on the cards for a while, and were already part of the expectations that led to our current positioning.
So what did happen to cause the dip in global markets? Well, the Chinese economy is currently growing at a much slower pace than it has been for a long time. To stem that growth, the Chinese Government has been intervening with various policies, with varying degrees of impact, but now it seems investors are losing confidence. That loss in investor confidence trickled out across World Markets, which is in itself interesting, as it confirms China’s importance in the global marketplace.
The importance of diversifying
So is it time to start panicking? Short answer? No. Longer answer? Here we go: We talked a lot about funds in our investment series, as well as the importance of diversification. Here’s where it matters. You see, even if the headline grabbing figure on Monday 24th August 2015 was the Shanghai Composite losing 8.5%, the chances are that most portfolios saw much less of an impact. Why? Well, because funds are diversified across multiple indices, across multiple industries and across multiple types of company. And of course, your portfolio might contain other types of investment, including bonds, which tend to go up in value when equities go down.
If we look at the FTSE 100 index here in the UK, even though it was indeed impacted by the plunge in China earlier in the week, it was also impacted by the US announcement on Thursday 27 August 2015 that growth was exceeding expectations, and rose 3.5% on the news. What is clear is that markets are affected by all sorts of things – slowing growth in China is a worry, burgeoning growth in the US is a fillip. It’s all part of what comes with investing in the Stock Market.
If you’re more of a short term investor, these moves present opportunities. As one of the world’s greatest investors, Warren Buffet, says: “be brave when others are fearful, and fearful when others are brave.” And if you’re investing for the long term, these moves are par for the course.
This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
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