Back in August 2024, global markets tumbled as spooked investors reacted to Japanese interest rate rises and a slowing US economy.
The leading Japanese index, the Nikkei 225, saw its largest ever single-day points drop. American and European markets plummeted too.
As an investor, these market falls – not to mention the headlines they spawn – can be worrying. They can also lead you to make some damaging investment mistakes.
Here are just five for you to be aware of and avoid.
1. Thinking that market dips are new
Stock markets rise and fall daily. Short sharp shocks are not only to be expected but are built into your long-term investment plan. They are the reason why your plan is long-term in the first place.
Source: London Stock Exchange
As you can see from this graph charting the FTSE All-Share Index over the last 40 years, global events, from the coronavirus pandemic and 2008 financial crisis to wars and elections, have been – and always will be – reflected in the stock market.
But a long time frame allows your fund to ride out these short-term drops.
2. Thinking that dips are to be avoided at all costs
Trying to avoid these market drops is not only incredibly hard but it can also be financially damaging. A common investment mantra that you’ll have heard us use before is, “It’s time in the market, not timing the market.”
You give your money the best chance to work for you if it remains invested. Market dips happen all the time but the important thing is that you’re there to reap the rewards when they rise again.
3. Allowing emotions to dictate your investment decisions
As we have already seen, market dips can be worrying, but the best course of action is usually to “keep calm and carry on”.
Let’s return to August’s market drop. On 5 August, CNN reported that the Nikkei Index had suffered its biggest one-day percentage drop since 1987 when it closed 12% down.
If your investments were heavily aligned to this index, an emotional, knee-jerk reaction might’ve been to sell off quickly, in fear that a further drop was on the way. Doing so would’ve turned a paper loss into a real one. Worse still, your money wouldn’t have been invested the next day, when the Index rose by 10%.
Falls don’t last forever and subsequent rises can represent some of the market’s so-called “best days”.
Here is a graph showing the effect of missing too many of these best days.
Source: CNBC (from JP Morgan Asset Management figures)
The graph shows a $10,000 investment in the S&P 500 between January 2003 and December 2022.
Trying to time the market, and by so doing missing out on 60 of the market’s best days over 20 years, would’ve cost around $60,000. That represents a $6,000 loss over the investment term, rather than the $54,000 gain achieved by leaving your invested fund alone.
4. Forgetting that the markets generally trend upwards
We’ve already seen that market dips are generally followed by market rises. You can see from the FTSE All-Share Index above that over the long term markets generally trend upwards.
The below graph from Schroders shows bear and bull markets – periods where global share prices have dropped by at least 20% or risen by the same amount – since 1970.
Note: The chart is split into separate bull and bear periods, each beginning from zero, so the graph should be seen as a series of charts running adjacent to each other.
Source: Schroders
What is immediately apparent is that bull markets tend to outperform the losses experienced during a bear market. Bull markets also generally last much longer.
In fact, Schroders confirm that the average bull market lasts for more than five years, compared to just one year for a bear market.
5. Worrying too much about what the crowd is doing
Put simply, the term “safety in numbers” doesn’t apply to your investments. While investor sentiment might make for interesting headlines, and have a short-term effect on markets, it has less bearing on your long-term plans.
That’s because your plans are very much that: yours, and yours alone. Herd mentality, or trend-chasing bias, can lead you to make decisions that don’t align with your long-term goals, risk profile, or investment term. This can be hugely damaging.
Much better is to focus on your own plans and remember that if your ultimate goal hasn’t changed then your plans don’t need to either.
Remember too, that whatever happens in the wider world, Globe IFA’s team of experienced professionals is on hand to provide expert advice and reassurance.
Get in touch
If you have any questions or concerns about your long-term investment plans, please email hello@globeifa.co.uk or call us on 020 8891 0711 now.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
