Reacting to Market Uncertainty – When Doing Nothing is Best

August 22, 2011

The sharp falls that we have experienced in global stock markets over the last few weeks are understandably unsettling for investors. However, since there has been no new or surprising news, the falls essentially amount to panic around the existing issues of weak economic growth in the developed nations and the sovereign debt issues in peripheral Europe. Consequently, we are no more concerned about the investment environment than we were a month ago and we would advise against changing established long-term plans.

Selling now would only make sense if coupled with the intention to buy back when stock markets have gone even lower – a dangerous strategy known as market timing.

The main risk of market timing is missing some of the biggest gains in the stock markets since both falls and gains tend to be concentrated in short periods of time with a cluster of falls often followed by a cluster of gains.

Indeed, research by Fidelity (based on the UK stock market, as measured by the FTSE All Share Index) shows that missing just the ten best days over the last 15 years dramatically reduces the annual return from 6.71% to 2.43%.

The only caveat to the view that ‘doing nothing is best’ is that stock markets at their current levels, e.g FTSE 100 around 5000, represent a buying opportunity – not as short-run speculation but as a good starting point for long-term investment.

Past performance is no guide to the future and no statement in this commentary constitutes any form of individual advice or guarantee. The value of investments can fall as well as rise.

Information in this document represents a consensus of views from various sources including those of Pearson Jones plc. Readers should not act on the comments made in this document without the benefit of Independent Financial Advice from a Pearson Jones Consultant.

Nick Pike CFPCM BSc (Hons)
Chartered Financial Planner
Investment Manager