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If you have stock market investments you have good reason to be feeling anxious in 2016. Markets are on a rollercoaster ride right now with prices careering up and down. This volatility is being driven by a variety of factors, amongst them the slump in the price of oil, slow growth in China and political unrest around the world including souring diplomatic relations in the Middle East, Islamic State’s control of Syria and North Korea flexing its muscles with its hydrogen bomb test.
If your stocks are falling sharply, should you protect your nest egg by pulling your investments out of the market altogether? It might be tempting but there are some good reasons why this is not the way to go.
Why else would the disclaimer about risk be so heavily emphasised on the websites and literature of investment managers? Markets are in constant flux, moving up and down incessantly and sometimes that yo-yo effect will be more pronounced than at others. That doesn’t mean you should panic.
The fact is that your savings have to go somewhere and none of the options are risk-free. Stashing thousands under the mattress leaves your money vulnerable to theft or fire. It’s safer in the bank of course but with interest rates low, your wealth is at risk of erosion from inflation and losing value.
If you decide to sell, how do you know the exact right time to exit the market? You could sell just before the rebound. And what about the moment to buy back in? How can you be sure not to do that at the very top of the market?
Unless you make the decision to steer clear from stocks for the rest of your life, you have to get your timing right not once but twice and the chances of doing that both times are inordinately slim.
According to figures from a JP Morgan Chase study, in the twenty year period from January 1995 to December 2014, six of the best performing days happened within two weeks of the ten worst days. That means that investors who panicked and ditched stocks after the crashes would have missed out on the upside which occurred days later.
The same study also concluded that being out of the markets on the days when the biggest gains occurred were massive. $10,000 invested continuously over 20 years rose in value to $65,453. Missing out on the ten best performing days, however, reduced the value of the final investment by over half to $32,665.
The message is clear: investors should keep their focus firmly fixed on the long term horizon and ignore knee-jerk reactions to market volatility. While these volatile periods may seem important right now, over decades they become mere blips on the graph.
For those approaching retirement the situation is a little different. Some action may be required to protect your wealth. There are steps you can take to counteract volatility such as revising your asset allocation and skewing the balance towards bonds rather than shares.
Whatever your situation, while panicking is to be avoided, now might be a good time to book an appointment with your financial adviser to review your portfolio and see whether it is still on track to achieve your financial goals. To speak with a qualified Infinity consultant get in touch today!
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