As I type this, stock markets around the world are experiencing very high levels of volatility. The FTSE100 recently dropped to more than 20% below its peak in April 2015. So, should you sell your investments in case things get worse?
Firstly, this won’t be a detailed look at the reasons for the current market troubles. There are better articles elsewhere dealing with this much more intelligently than I can.
Fundamentals and sentiment
When considering the value of anything, I reckon there are two main factors, and these can be explained by considering residential property, which most of us understand.
The value of your average house is in part dictated by the obvious things, such as the number of bedrooms, its location and its age. So five different three-bedroom bungalows, in good decorative order, and in close proximity to each other will be priced roughly similarly.
But overlaid on top of that will be the sentiment of the market at any given time. If one of those bungalows has six people wanting to buy, there’ll be a bidding war and the price will rise. If nobody is buying, then the price will fall.
Fundamentals and sentiment; these are the two factors at play. Right now, according to those smart cookies who look after our clients’ money, the fundamentals of the world economic situation are fairly benign.
Unfortunately, the weight of investor sentiment is pretty negative at the moment, and this is fuelled by ignorance of what’s really going on, and by our media who like nothing more than a good market crash before breakfast.
Should you sell?
I’ve just bought a house. If someone came to me a year from now, and told me it was worth £50,000 less than I have just paid for it, would I panic and sell the house to spare myself any future losses? Of course not! As long as I still own the house, its value is likely to rise in future, and as I don’t have to sell it now, I might as well hang on.
If the value of your investment portfolio is looking a bit sick at the moment, you should remember that you still own the assets that you held before the market started tanking. Chances are very good indeed that their value will rise in future, if you hang in there.
This is why any competent investor will never commit to the stock markets, any money he or she needs in the short term. And that’s why investing is different from saving – one is long term, the other short term.
Please don’t sell your investments now to spare yourself further losses. As long as you still own your investments, you haven’t lost anything, except on paper. But the moment you sell, that loss is crystallised into real money, and that’s not a great idea.
One last point: If you have money available which you can commit for the medium to long term, the recent market dip could be considered an opportunity to invest. As always, please seek advice from a competent investment professional before making a decision to invest.