A sell off of US tech stocks recently spooked investors – after a stellar rise over the year, firms like Amazon were pegged back – and the FTSE 100 followed the US markets by dropping sharply again.
You would be mistaken though if you thought that it had all been doom and gloom this year, not all sectors have fallen by any means.
Some sectors, such as Gilts (essentially loans to the Government) which are seen as more secure, have risen as investors flocked to what they considered safe-havens. Although the UK stock market has seen a dramatic fall since the start of the year, that is certainly not a case for equities worldwide, as the Asian equity and US equity sectors both are currently posting positive returns since the start of the year.
This all goes to show the benefits of diversification within an investment portfolio, and not having all your eggs in one basket.
Uncertain times for the UK
The UK stock market certainly seems to have been hit a lot worse that many since the start of the year.
For example, at time of writing the main UK index, the FTSE 100, has dropped 23% since the start of the year. In the same period, the US S&P 500 index has actually risen by over 6%. Quite a difference.
The UK economy shrank considerably, and data has revealed the country entering a steep recession.
Rising unemployment levels, fears of a second wave of coronavirus, and the ongoing US-China trade tensions (not made any easier by the pandemic) have all caused investors to be wary. On top of this we have Brexit to contend with as well, so it’s not surprising that the stock market is pretty volatile.
The US market
Despite big numbers in terms of infections and unemployment, as I mentioned before, the US stock market has performed well. And there are reasons for that.
There are some big technology companies on the S&P 500, such as Apple, Microsoft and Amazon, which have also always had big influence, and never more so than now. Factors such as working-at-home have been gradually creeping in, but have accelerated due to the pandemic. We at Lovewell Blake Financial Planning, for example, are one of thousands of companies who have started to use Microsoft Teams in recent months.To work at home successfully, you need the technology, and if you’re not allowed to go to the shops, you need to shop online. All this has helped the profits of the big technology companies.
The headlines recently told us that Apple was now worth more than the entire FTSE 100 index, and this tells you something of the clout the tech firms have. The movements of these companies matter more on the stock market than smaller value companies such as the airlines, and this is partly why the US market has done better than you might think.
Like in the UK, the Federal Reserve has also done its best to help during the crisis. It has cut interest rates (to encourage investment) and promised to help out with riskier corporate debt. Again like in the UK, congress also gave its approval to an unprecedented amount of economic aid.
Elections are looming in the USA, and this will almost certainly have an impact on Wall Street, so analysists will be looking to see out this pans out.
Should I be worried about my investments?
At Lovewell Blake Financial Planning we make the point that investing should be for the long-term, and if you are in it for the long haul (generally 5 years or more), then you shouldn’t be majorly concerned.
Market volatility is part-and-parcel of investing, and there is always uncertainty. Large falls happen every-so-often, but once the issues that caused them are resolved, markets usually recover fairly quickly. Of course there is no guarantee of that, but it is important not to panic.
If you are withdrawing monies from your investments, or if you are close to retirement, it would be prudent to review your strategy. If, however you are in your 20s and saving into a pension for your retirement in 40 years, it really shouldn’t overly concern you.
Diversification is key
As mentioned earlier, UK equities have seen a big fall this year, whilst US equities have seen a rise. On top of this, fixed interest investments have generally seen good returns. So you can see the importance of hedging your bets by placing your monies in a range of assets.
For example, whilst the FTSE 100 has dropped over 20% since the start of the year, one typical multi-asset fund aimed at an investor with an average attitude to risk, has only fallen around 3%.
Don’t panic sell
In general, selling your investments in a period of uncertainty is not a good idea. Panic selling will lock in losses and you will miss out should there be a recovery. If you’d have sold at the height of the market falls on the 23 March 2020 for instance, you’d have locked in a heavy loss and missed out on a sharp tick back up.
A financial adviser can help you to formulate an investment strategy, fully diversified in line with your attitude to risk, aims and objectives.