A client sent my an email today with the question ‘I love a disaster story, should we buy gold?’ Attached was an old article from Moneyweek about the market crash of 1987.
The 1987 crash was perhaps unusual in that during the first part of the year, markets shot up dramatically with the FTSE rising by 40%.
Then came Black Monday – a global crash which effected every market and brought values more or less back to where they had started.
All of this happened over the same week as the Great Storm in the UK and must have been a torrid time for any investor.
However, looking back now, that extreme level of volatility is only a small blip on the long term graph of the FTSE 100.
The point here is that volatility is normal.
We have seen volatility coming back into markets recently after an extended period of relative calm. For long term investors this should not be taken as an indicator to buy gold or move to cash. Equally it does not mean people should put their last penny into investments. Timing the market is a dangerous game and plenty of professional investors get it wrong every day.
The key is to have enough money available to cover short to medium term goals and objectives and to let market ups and downs work themselves out over time.
Set a portfolio which takes account of your capacity for a paper loss in the short term – few of our clients are invested fully in equities because they do not want to experience the full volatility of the markets. Once in place, both the risk level of the portfolio and your own appetite for risk should be reviewed regularly. Ideally, this should be with an adviser, otherwise it can be too easy to either put this off or to make changes based on emotion and current headlines.
My client has decided to ‘stand firm’ and remain invested.