Don't believe everything you read in the press

22 January 2008

Today has been an absolute gift for headline writers and news reporters - World Markets Plunge, Recession Fears Spark Biggest Share Fall Since 9/11. They may as well be done with it and tell us the end of the world is nigh.

Ok, so the falls we've seen have been pretty substantial - especially as they've not been confined to the West and have spread out to Asia and the emerging markets. But does the average investor out there really need to panic?

If you'd planned to cash in all your investments today then yes, ok, I'll let you off, but for the average investor who is invested for the long term it really shouldn't matter. The nature of stockmarkets means the value of your investment will always rise and fall, but with a timeframe of 10 years or so you have time to ride out any short term volatility (over 10 years there's a 90% chance that you'll earn more by investing in the stockmarket than you will by saving in a cash account, and over 18 years the probablility rises to 99%).

In fact if you are drip feeding money into the markets on a monthly basis (via are an ISA or pension for example) you can actually profit from a spot of volatility (a phenomenon known as pound cost averaging) as when prices fall you're able to buy up more units.

But of course you'd never have got that impression from much of the press I've seen today. In fact, one expert I spoke to today said he had provided some very balanced comment to this effect to a journalist at a national newspaper, but surprise surprise his comments didn't make the cut and were edited out of the piece.

Balance, after all, doesn't sell newspapers.

Balance does, however, make good investors and that's one lesson in investing that gets illustrated every time the markets wobble.

Spreading your money across different sectors and across different assets (from cash to bonds, property and equities) means that when one area of your portfolio loses money, the rest of it shouldn't take too much of a hit.

This latest bout of volatility therefore shouldn't provide you with an excuse to get out of the markets altogether, but it should perhaps provide the incentive to give your investments a thorough review.