Barclays Investments Online (new window) has invited UK financial journalist Cherry Reynard to share her thoughts on recent market volatility. In her article, Cherry reminds investors that markets rise and fall.
The article can be read below:
So it’s the end of the world all over again. The past week has seen the type of markets that can put people off investing altogether. The FTSE 100 has lost over 10 per cent in a week and is still falling. For even the most robust investor, it is tempting to sell up and put your money under the mattress. But at times like these, it’s important investors don’t act in haste or they risk repenting at leisure. So in this article, I will examine the origins of the crisis and how investors can deal with the volatility.
What's caused it?
Markets have had a dripping tap of bad news this year, but two things are troubling them most – a European default and the weakness of the US. The origins and germination of this crisis will fill books for decades, but it is possible to distil it into a couple of key themes.
1. The US credit downgrade
This latest round of selling has been triggered by the US downgrade. It is easy to think of credit ratings in terms of school reports, in which context the difference between AAA and AA+ doesn’t seem like something terribly worrying. But for the US, it means that they risk paying more for their debt. People need just that little bit of extra incentive to lend to an entity rated AA+ over an entity rated AAA, and this matters when you have a debt pile of trillions.
2. European debt situation
The markets may have weathered this issue on its own, but the European situation rumbles on in the background. The problem is, again, one of excessive debt. Greece, Portugal, Italy and others have vast and, in some cases, potentially unsustainable debt burdens. At the same time, economic growth is either slowing or reversing, which means lower tax revenues and higher social security spending, so the problem continues.
Many EU countries have implemented vast austerity packages, but they take time to work. In the meantime, the markets fret that the countries will not be able to pay the interest on their debts. Eurozone policymakers have bailed them out by lending them money, and then by renegotiating those loans at lower interest rates, but markets remain unconvinced that the problem is fixed.
Don't make hasty investment decisions
While measures being taken to cure the ailing global economy could well fix everything, there is no doubt this backdrop looks difficult. But remember that markets tend to go up and down. So for many investors, panic-selling on short-term market turmoil has seldom been a profitable strategy.
The reality is that investment returns are not great all the time and investors should always expect some turmoil. But – however uncomfortable the recent falls – markets can often bounce back and missing those bounces could erode your long-term returns. Investing requires patience and commitment over a few years. So don’t be put off by the current burst of shaky markets.
In conclusion: keep calm and carry on and don't panic!