How to survive a stock market slump

As volatility returns to global markets, investors are watching for opportunity, not tragedy

Despite the heavy falls in the Dow Jones in particular, the index is still trading around 20 per cent above where it was this time last year (Getty)

Just in case you have somehow missed the endless images of exasperated traders, a period of record calm on the globe’s stock markets was brought to an abrupt halt this week as speculation over inflation in the US sent shockwaves around the world.

The FTSE tumbled to its lowest level in nine months amid events described simply as “brutal”.

In fact, not only is this simply a return to business as usual after last year’s largely turbulence-free run, but experts are also reminding investors that there are opportunities to be had.

So how do investors thrive and prosper while the markets ride a rollercoaster of undetermined length? Here’s what you need to know.

What’s it all about?

“Global markets are worried the inflation genie may be out of the bottle, after US wage growth jumped up unexpectedly last week,” says Laith Khalaf, senior analyst at Hargreaves Lansdown.

“The fear is this may prompt the Federal Reserve to raise interest rates faster than expected, which would push up bond yields and make equities look less attractive by comparison.

“It would also make it more costly for companies to finance their activities if debt becomes more expensive after a decade of cheap money, thanks to loose monetary policy in the wake of the financial crisis,” he says.

A little perspective

Occasional corrections are part and parcel of a functioning stock market, deflating pockets of exuberance and allowing new investors to buy in at lower levels.

Meanwhile, despite the heavy falls in the Dow Jones in particular, the index is still trading around 20 per cent above where it was this time last year.

“In the long term markets are more reliable in generating growth, and so anyone saving for retirement should still consider the stock market as a friend not a foe,” Khalaf adds.

In fact, economic weakness or long promised correction, the outcome could be positive for savers regardless says Calum Bennie, savings specialist at Scottish Friendly: “If this does indeed mark the return of inflation and subsequently higher interest rates, it could be the news long-suffering savers have been desperately waiting for. The correction, perhaps perversely, means that investors will no longer be on tenterhooks and can carry on investing with confidence.”

It’s by no means all good news though. While those regularly saving for a distant retirement may even gain from the latest slump as their next contribution will buy more of their investments at a lower price, the group most at risk are those already drawing from their pension.

(Indeed, financial advisers are urging all investors to dripfeed any money they want to invest to take advantage of lower prices as well as reducing the potential damage a further fall might have on their portfolios.)

Should the fall continue, those taking more than their underlying investments return may need to reduce or even stop their withdrawals entirely to make sure their pension lasts for the rest of their life.

Nobody panic

“So far, we haven’t detected widespread investor panic, with buyers far outstripping the number of sellers on [our] platform, approximately three purchases to one sale,” says Mark Taylor, chief customer officer at Selftrade from Equiniti.

“Investors still have plenty of cash sitting on the sidelines of their portfolios, and are therefore waiting to pick up some bargains if the market adjusts. We have seen that activity in banking stocks has been hit but investors are taking advantage of these lower prices.

“A number of retail customers were also anticipating a fall in the market and hoping to take advantage by shorting.”

If current market swings continue though, there are actions all investors should take.

“Look at how well you have spread your investments both on a geographic and asset class basis,” adds Taylor. “With Asian markets faltering, it may be sensible to look at reducing your exposure to this market. It is also worth looking at whether you have got too much in riskier asset classes such as equities.”

Take profit

Investors sitting on gains could decide to realise and re-invest them in new stocks or funds in order to diversify risk, including into uncorrelated asset classes that don’t move in the same way as the stock market.

This requires some research but may cover assets such as gold or infrastructure.

Timing isn’t everything

While there’s little evidence that investors are feeling the pressure to panic sell, the temptation to try to time the market – beating the market by attempting to buy funds or stocks and the bottom of the cycle and selling close to the top – is alluring.

The truth is this is fiendishly difficult and getting it wrong by just a few days can have a fundamental effect on long-term gains.

Research by Fidelity International has found an investor who invested £1,000 in the FTSE All Share index 30 years ago but missed the best 10 days in the market since then would have achieved an annualised return of just under 7 per cent and ended up with a total investment of around £7,200.

That compares with an annualised return of more than 9.00 per cent and investments worth almost £13,500 if they had stayed in the market the whole time.

Miss the best 20 days and your return would have been eroded to just 5.3 per cent – equal to an annualised return of only £4,700 over the past three decades.