- Market fluctuations reported across the media
- evestor's investment strategy protects investors from corrections
Over the past few days, you may have read headlines like ‘US stock plunge sparks global sell-off’ and ‘Stock market turmoil: $4tn wiped off shares’ as the financial media attempts to encourage panic in investors. The truth is that while the financial media thrives on big headlines these types of market corrections are commonplace in people’s long-term investment journeys.
What’s behind these market fluctuations?
There are many reasons why this correction has occurred, but anticipation of rising interest rates is thought to have played a key role.
In 2017, global economic growth began to accelerate. Although economic growth is positive for global markets, governments must manage this growth carefully to help control inflation (rising prices). They can do this using interest rates.
Broadly speaking, when inflation occurs, and prices rise, people have less money to save after their outgoings. The government increases interest rates to make saving more attractive. Raising interest rates also means the cost of borrowing increases - this eats into companies profits and makes mortgages and loans more expensive for consumers.
If this delicate rebalancing of the economy happens too quickly, it can be a bad thing. The recent market correction is thought to have been caused, in part, by the prospect of interest rates rising faster than expected.
As the news spread, complex financial products very closely linked to market volatility are thought to have pushed the correction further.
For now, the trigger of this correction remains speculative, but over time we will be able to look back and determine the true cause.
What does this mean for my investments?
For long term investors with a long-term financial plan in place it doesn’t mean anything. There have always been dips and corrections in the market and there always will be.
We want to put the events of the last few days into context. The S&P 500 stock market index fell by 4.1% on Monday. It’s a sharp fall, but the good news is that it had actually grown by 22% in the preceding 12 months, by 96% over the last 5 years and by a huge 130% over the last 10 years. This 10-year growth would also have included two previous market corrections (similar to what we’re experiencing now) and the start of the last major financial crisis back in 2008.
This history shows that while you may see several market corrections in the life of your investment, often much worse than the ones that have struck this week, these periods will be smoothed out by positive growth in the long term.
We understand that people have an incredibly emotive attachment to their hard-earned money, and rightly so. It can be unsettling but it’s important to remember that these are natural fluctuations in the market.
The core principles of our investment strategy - broad diversification of asset, low costs, and long-term discipline - helps to minimise the impact of these changing markets and support our investors in achieving their long-term investment goals.