How will stockmarket volatility affect your investment portfolio?

Stockmarkets took a dramatic tumble at the beginning of August, with the FTSE 100 dropping by almost 19% between 28 July and 8 August, dipping below 4800 at one stage. UK shares lost £35 billion in value.

The reason for the volatility is twofold: the eurozone debt crisis and the US losing its AAA credit rating for the first time in its history. Markets have rallied marginally since then, with the FTSE back above 5000 at time of writing, but they remain nervous.

What happens next will depend on how both the US and the eurozone address their current issues.

Led by the US

The main concerns are that after the US government's downgrade by credit rating agency Standard & Poor's, US companies will suffer a similar fate, which will impact on investor confidence, says Dominic Rossi, chief investment officer for Fidelity. "This will have an immediate effect on confidence in general, which will feed through to the economy and equities."

US President Obama has assured investors American bonds are still a safe buy, and two other credit agencies, Moody's and Fitch, maintain top rating for US debt. Japan, the second largest holder of US bonds, also says it has "no problem regarding the creditworthiness of US treasuries" in its official statement.

However, relationships between the US and China could suffer. An official statement from China, the biggest holder of US treasury bills outside the country, says it has "every right now to demand the US address its structural debt problems and ensure the safety of China's dollar assets".

The eurozone situation

Investors seem more concerned by the ongoing debt issues in Europe. Tom Elliott, market strategist for JPMorgan Asset Management, says the eurozone debt crisis is likely to "go on and on until there is decisive action".

"Ultimately, the outcome of the eurozone debt crisis will be either a full or partial breakup of the union, or greater fiscal and political integration," says Ted Scott, director of global strategy at F&C Investments.


Recent financial events have given many private investors the jitters - but others see cheap markets as a golden buying opportunity. So what's the outlook, and what should you do now?

Q: How bad really is this market turmoil?

The last market crash began in September 2008 when Lehman Brothers Bank folded; the market bottomed in March 2009. During that time the FTSE 100 fell by just over 30%.

"The recent falls, while bad, are actually only half as bad as the Lehman events a few years ago," says Alan Dick, managing director of Forty Two Wealth Management.

Q: And how long could it take for markets to recover?

It is impossible to know - both the eurozone and the US have enormous problems to resolve, but as Stephen Barber, economic adviser to broker Selftrade, points out: "Markets are quite clearly discounting a more bleak economic future and investors are asking if we have now seen the worst of this pessimistic run."

A bounce could repair much of the damage quite swiftly - the FTSE 100 was up by 83% from its March 2009 low point to the start of the present troubles in July. But further turbulence in the shorter term is a strong possibility.

Q: I am dismayed by the losses to my fund portfolio. Should I get out of the market?

Recent volatility has been particularly bad, and there may be more to come - but selling up and leaving the market after a big fall just cements your losses. "Investors who are in a position to accept fluctuations in the value of their capital should probably ride out the current volatility, though the market could fall further," says Mark Dampier, head of research for Hargreaves Lansdown.

You should review your asset allocation, however: if you're sceptical about the prospect of market recovery in the coming months but your portfolio is weighted towards equity funds, consider moving part of it into lower-risk areas such as the Global Bond or Cautious Managed sectors.

Q: How can I protect my investments against further falls?

Ensure you have a well-diversified portfolio, including cash, index-linked gilts, bonds and global equities. Absolute return funds designed to produce positive returns even in falling markets can also help, though you need to do your homework before you buy, as some funds in this sector are much more volatile than others in the short term.

Alan Dick points out that his clients typically have around 40% of their portfolio invested in cash and fixed interest (defensive assets). "They would have seen a fall of around 10% instead of the 15% suffered by the FTSE 100 from 25 July to 10 August, and would still be sitting on a gain of almost 50% from the market low in March 2009," he says.

Q: I am supposed to be retiring in a couple of years' time. What can I do to protect my pension?

Those approaching retirement age certainly have most cause to worry because they may not be able to wait for the markets to recover. However, many nearing retirement should already have relatively low exposure to risky sectors such as emerging markets and commodities, and indeed to equities in general.

Stephen Page, director of financial planner Page Russell, says: "The recent market turmoil should not pose a problem for most investors coming up to retirement, as long as they have a well-diversified portfolio. Both index-linked gilts and short-dated corporate bonds defend against volatile equities.

"For investors who have less than five years to go, it might be worth waiting for the market to recover before switching a proportion of growth assets (equities and property) into cash or defensive assets each year leading up to retirement, to secure your pension fund."

If you are retiring very soon and have a reasonably sized pension pot, Stephen Page adds that one option would be to take the maximum tax-free cash to cover living costs, and leave your fund to recover before taking an annuity.

But there are various risks involved in this strategy and you should take independent advice.

Q: The media is all doom and gloom but experts keep talking about opportunities - who do I trust?

Both sides are right - the economy is far from OK but experts say it creates great long-term buying conditions.

"History shows that extreme equity market volatility, as we are now experiencing, should be seen as a time of opportunity," says Anthony Bolton, fund manager of Fidelity's China Special Situations.

Moreover, companies are generally in pretty good shape, delivering good profit and dividend growth. As Dampier points out: "Company fundamentals have changed little in the past week [week commencing 12 August], but share prices in many cases are 10-20% cheaper."

Q: I am a fairly cautious investor - are there any opportunities suitable for me?

For a start, if you're worried about further market falls in the short term, it makes sense to make smaller regular payments into the markets for a few months, rather than going the whole hog with a lump sum.

Justin Modray, founder of, also suggests looking for equity income funds that make regular payouts: "Dividends provide some sort of buffer against capital losses, because yields rise as share prices fall."

Q: And what about if I am prepared to take more risk?

Moving away from developed markets to Asia is hardly a new story, but emerging markets in Asia, Eastern Europe and Russia, though they too have lost value recently, are receiving renewed attention on the back of eurozone and US trouble.

Bruce Stout, who manages Murray International Trust, particularly favours Asia and Latin America, which are both "in much better financial health" than the developed world.

However, some commentators believe the cheapness of shares worldwide means there are real bargains to be had nearer home. John Ventre, portfolio manager at Skandia, believes European equities are very oversold and currently offer excellent opportunities. 

The price of gold continues to soar, so gold exchange-traded funds or broader commodity funds may also be a good shout. Be aware, however, that gold could lose value once market conditions improve.