Last week began with the US Government finally reaching an agreement on its deficit with a cutting programme of at least $2.1 trillion dollars over the next ten years. The political gesturing that caused the agreement to stall and be agreed at the last minute ensured the US did not default on its debt repayments for the first time in history. It became apparent during the week that there was growing concerns that the economic recovery in the US was faltering. This coupled with the continuing economic turmoil in Southern Europe, particularly Greece, Spain and Italy caused global stock markets to fall rapidly in recent days.
The fall in stock markets has caused panic in global financial centres. We are experiencing a period of extreme volatility in the markets at the moment, but have seen this happen on a few occasions since the credit crunch began. Typically this unnerves both investors and the general public when it happens and can cause people to react badly. It needs to be remembered that stock market investing by its very nature can experience high levels of volatility at certain times and this is one of those moments. We saw this happen when the markets were concerned about Dubai defaulting in November 2009 when the FTSE 100 lost 3.2% in one day and then bounced back. More recently we saw markets react very nervously when Japan suffered its terrible earth quake and tsunami.
Most people will have some money invested in the stock market. It could be in a stocks and shares ISA, a pension fund or investment bond. It is important to remember why you invested in the first place and not panic. Investments should have a long term time horizon of at least five years or more. Therefore the fact we are going through one week of extreme volatility does not mean your investment will be a disaster over a number of years.
If you have an investment portfolio it should be diversified, because this smoothes out the ups and downs of the stock market. So you should consider holding a variety of cash, fixed interest, property and equities. Those who have followed the basic investing principles should not feel the need to make any knee jerk reactions now.
Those who make regular contributions into their ISA or pension could see this stock market volatility as a real benefit. Lows in the stock market allow you to take advantage of lower unit prices when buying funds on a regular basis.
We need to remember that we have been here before watching stock markets fall and it is highly likely we will be here again. Typically when investor and the public sentiment starts to improve, stock markets bounce back strongly.