The Stock Market is a long-term game as events of the last few months have shown. Markets worldwide have taken a tumble following plunges in China’s main Shanghai Composite exchange. Falls in the FT-SE 100 last week wiped billions off the value of the UK’s leading companies, although a fair chuck of that has been recovered since.
But none of this is new. Stock markets rise and they fall. It has always been this way and there is no reason to think it will ever be any other way. That is the nature of the beast. Some people have made a lot of money when markets rise and more have lost a lot of money following markets on the way down.
That’s fine for professional investors who understand the risks but for many of us ordinary investors who invest mainly through Stocks and Shares ISAs or via our pension funds the warning that we are given when we initially invest that ‘The value of your investments can fall as well as rise’ doesn’t really seem to cover the large falls in markets that we saw over the last few weeks. The immediate reaction is to panic and get out of the market when we can, and that may seem the natural thing to do and the best way to minimise losses in case the market falls even further.
Unfortunately it is rarely the best thing to do. The only thing you will do if you sell is crystallise your losses and make it much more difficult to get back any money you have lost. The main index fell 5% or so last week. There are not many savings accounts that pay that amount of interest in a year so if you take all of your money out of the market the day after that kind of fall chances are you won’t recover for a while.
That’s why it’s important to understand these risks before investing in the stock market. And to take time to look at the funds your pension and ISAs use to make sure you only have as much exposure to the Stok Market as you are comfortable with. And if you do understand the risks, and are able to stick it out through the turmoil then the chances are that you come out the other side unscathed.