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Foster Denovo|News & opinion|Opinion|Market volatility and coronavirus

Market volatility and coronavirus

As the coronavirus pandemic continues to affect the stock market, what does this short-term volatility mean for your long-term goals?

With the UK entering nationwide lockdown, Covid-19 looks set to dominate headlines around the world for the foreseeable future.

As at 7th April 2020, the number of confirmed cases stood at around 1.3 million worldwide with reported deaths at around 74,000, and the virus has spread to six of the world’s seven continents – only Antarctica has escaped.

In financial terms, the continued impact on global stock markets is clear. Between 2nd March and 30th March, the value of the FTSE 100 fell by around 17%. Other global stock markets have seen similar falls.

But, whilst short-term volatility can be concerning, it is important to hold your nerve, remaining focused on your long-term goals.

Keep calm

Investments are a long-term strategy and, although short-term blips can be worrying, they are also to be expected. There is a tendency to think emotionally when the market dips, but it is important to avoid knee-jerk reactions.

If we track the FTSE 100 over the last 10 years, it is clear that it has experienced many blips. According to IG though, the compound annual return of the index over that time was 8.8% with dividends reinvested – a total return of 121%.

FTSE 100 Index since 2009:

FTSE 100 since 2009

Source: IG

During the last 30 years, we can see the generally upward trend as outlined by this Vanguard Index Chart.

It also highlights the many periods of short-term volatility.

Vanguard 2019 Index Chart

Stay focused

When investing in the stock market, periods of short-term volatility should be expected and accepted. Everything from international trade wars to national elections can affect markets around the world, and prices will fluctuate daily.

However, in the long term, markets tend to offer positive returns.

It’s important to remember:

Short-term volatility will happen

In the context of long-term investment even a sustained period of unrest, such as the 2008 financial crisis, becomes a momentary trough if we look at market performance over the longer term.

Diversified portfolios are intended as long-term investments, so if your long-term plans haven’t changed, then neither should your investment strategy.

Learn to ignore the noise

Usually when we talk about stock market ‘noise’ we are referring to local or national politics, or the future of the UK high street. This time, we’re discussing a genuine threat to life, but the stock market will react in the same way.

Coronavirus has led us into a period of great uncertainty and – as we saw with the US-China trade wars and the Brexit negotiations before it – the stock market, in the short term at least, greatly dislikes uncertainty.

But ignoring this noise is crucial to your long-term plan. In emotional times you might be tempted to react emotionally, making snap decisions without considering the bigger picture.

Over the next few months, we will be using our expert knowledge of the markets to help you drown out the noise, keeping you on track towards your long-term goals.

Have confidence and wait it out

Business magnate Warren Buffet is an oft-quoted source of investment advice. About long-term investment, he has this to say, “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”

The portfolio you hold is designed to ride short-term volatility, however unprecedented its cause. And although past performance is no guarantee of future success, the evidence suggests that over the long term markets offer positive returns.

A good adviser will be there with you for the whole of that journey, long after the current crisis is over.

Your long-term goals

It is not possible to say for how long coronavirus will stick around, or for how long the current state of UK lockdown will last.

And although this period of short-term market volatility has an unprecedented cause, in the longer term the markets will most likely react as they have done in the past – by recovering and continuing in their upward trend.

Holding on to your investments now, avoiding emotional decisions and settling in for the long term with trust in your financial plan, is the best way to achieve your long-term goals.

The value of your investment can go down as well as up and you may not get back the full amount invested. Potential investors should be aware that past performance is not an indication of future performance.

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