Tuesday, February 13, 2018
Recent Market Volatility
You'll all be aware of the media focus over the last fortnight on the fact that the Dow Jones (DJIA) had its biggest single points fall in one day and the ‘fear index’ VIX increased by 100%.
In fact markets have given back the unexpected surge in equity values in December and are just marginally down over this period. The Dow is 7% off its all-time high and volatility has returned to historically normal levels.
Nevertheless, this turbulence serves as a perhaps unwelcome but useful reminder of why we follow a rigorous investment process.
Firstly, our core principles remain, ie:
- Separate Savings from Investment and hold a sufficient cash reserve at all times to cover short term (up to three years) income shortfalls, any planned expenditure and your personal sleep-at-night buffer
- Take a sensible long term view understanding that while any invested funds may well be instantly available you should mentally at least commit to a rolling five to seven year timescale.
The trigger for the recent falls may have been the news out of the States that inflation is rising and interest rates may follow. Markets have benefited from ultra-low interest rates for many years now, so it should be no surprise that as expectations for interest rates are being revised up, market turbulence has followed. Traders (many automated) took short term gains and we took a small step back.
But, it could just as easily have been any other piece of ‘bad news’ and we should expect further wobbles as some companies carrying a lot of debt struggle to service that burden as interest rates rise.
So, expect a period of readjustment as we get back to more normal market conditions where daily swings of up to 3% are not unusual.
That said, all portfolios remain in positive territory over the last 12 months and while recent investors may have had a rough entry, if they are investing for the long term all this will wash through.
All portfolios are broadly diversified with a global allocation to shares being balanced by quality fixed income holdings. We are not recommending any changes other than in the normal course of rebalancing and tax harvesting to use allowances.
If you would like further information, or have any concerns, give the FPC team a call on 01704 571777. We will of course cover all of these issues as part of our normal on-going review process.