It is never a nice feeling when markets go through periods when they fall; and it certainly does not help to settle the nerves when we see sensationalist headlines like ‘RBS cries “sell everything” as deflationary crisis nears.’ (Daily Telegraph) or ‘Worst start to market year in two decades’ (FT.com).

To feel unsettled is natural; to panic and sell out of equities is an unreasonable overreaction to the normal workings of the market. Remember that there are many analysts and economists who do not hold these views, but headlines such as ‘Markets might go down or up, or sideways, who knows?’ are hardly going to make the front pages.

For those who have been around markets for many years, this is just another step – this time backwards – on the bumpy journey. Two steps forward, one step back would not be an unreasonable mantra for stock markets. Large scale market falls and their recovery is the nature of equity investments.

No-one knows what is going to happen in the markets. All we know is that over longer time horizons, equities are more likely to deliver higher returns than bonds and cash.

Things to remember at times like these:

  • Markets work pretty well. They absorb all of the information publicly available to investors in their prices. The news on China is not new and should already be fully reflected in market prices.
  • As such, markets go up, down and sideways from time to time, depending upon the release of new information.
  • When investing, you do not make a financial loss unless you sell your holdings. If you are a long-term investor you have the luxury of being able to hold your assets until the storm passes.
  • Now is the time to check the stability of your portfolio. If it is well-diversified with a carefully considered balance between bonds and equities then the performance of your high quality bonds will mitigate the effect of equity market falls on your portfolio. If so, those headline numbers are not your numbers, as you are not 100 per cent invested in the equity markets.
  • It is not all doom and gloom; the US and UK economies are still growing strongly. The UK has more people in the workforce than ever before. New car registrations have just reached an all-time high. Petrol is 99p a litre! UK GDP per head is above pre-crash levels.

Investing is a long-term game that requires patience, discipline, fortitude and time.

At Cavendish, where portfolios are built to weather any storm, our clients know to block out the market noise, stick with the programme and not look at the transient value of their portfolio too often. As a wise old sage once said:

‘Look at your cash everyday if you like, your bonds every three years and your equities every ten years’.