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Market volatility - stockmarket performance over the past few years.

Posted: 19 August 2010

Author: Phillip Green

Anyone looking at stockmarket performance over the past few years could be forgiven for wondering what is going on.

Of course, volatility is one of the factors that investors have to accept and, in many ways, this is not always a bad thing. After all, financial investments should be seen over the long-term and in most cases – especially where they are being bought on a regular basis – occasional falls in value need not be a matter for real concern. When share values fall, you get more of them for a given investment – this is sometimes referred to as pound-cost averaging.

What really matters is the value of your shares when you want to sell them in order to get money back.

Are markets really that volatile?

Recent fluctuations in share prices brought on by the banking crisis and subsequent recession caused us to look at the degree of market volatility over the past 20 years.

What stands out in particular is not so much how markets have moved (on a monthly basis) since the start of 2008, but how little they did so during the previous four years (and during the period 1996 to 1998, for that matter).

We plotted the month end values of the FTSE100 and compared how much movement had taken place since the end of the previous month. The movements ranged from +11.5% in May 1990 to -13% in September 2008 but only in a handful of cases were there more than three or four consecutive months of decline. Equally, only in a few cases were there long ‘bull’ runs, where values increased each month for more than six months.

Putting this into context, the FTSE100 is now some 125% higher than in January 1990, so volatility in the intervening years has not done much harm over the longer term. However, if you look at the 15 years since 1995, the FTSE100 has grown by only 75%, while it currently stands some 16% lower than at the start of 2000. The last five years have seen this index grow by just 8%, which reflects recent economic and market conditions.

The key message is that markets are inherently volatile, but short-term movements (upwards as well as downwards) should not overly concern investors. This does, however, also reinforce the importance of high quality independent financial advice, if you are to select the right asset mix and fund selection to match your risk tolerance.

Managing volatility

There are times when short-term volatility can be an issue, but these are largely when you require access to your capital. Provided you have sufficient advance warning of this (which applies to mortgage repayment plans and retirement investments in particular) you can consider gradually moving out of equities into investments that offer a higher degree of predictability over the shorter term. There is, of course, a trade off – that growth is likely to be lower in respect of such investments; but there is equally less chance (depending on what you actually switch your money into) of a loss of capital value.

Making investments work for you

Everyone has a different tolerance to investment risk – of which volatility is just one aspect. It is important to understand just how much risk you are prepared to accept; and how much growth potential you are prepared to give up, in order to avoid taking on greater risk than you can live with. Nothing in life is really risk-free, so it is important always to take professional financial advice before making any decision relating to your personal finances. As ever, the value of investments is not guaranteed and will fluctuate; you may get back less than you put in.