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Wise after the event

It's been a difficult week or so for investors. As the FTSE 100 dropped by 3.46% in a single day headlines screamed "Billions wiped off stock markets!". Market commentators and investment professionals queued up to tell us that, based on the state of the Chinese economy, US monetary policy or commodity values, this was obviously going to happen and that prospects for investors are pretty grim.

When stock markets fall it's difficult not to feel that it's going to continue indefinitely. Equally, when investments are doing well it feels like the only way is up. Neither are true. The reality is that in the short to medium term no one knows which way markets will go, even those who are deemed suitably qualified and experienced to air their views on television or on the radio. The only certainty is that there will be ups and downs.

Though we don't know how long it will take, stock markets will ultimately recover. The FTSE 100 will break through 7,000 again and beyond but in the meantime shares may well see further big falls. After a 20% drop over 8 months, and the day after a 3.4% fall, predictions of a stock market collapse don't feel particularly insightful. It's already happened!

Admittedly not all bearish commentators are only just jumping on this negative band wagon following this week's market falls. Some have been bearish in predicting stock market falls for a long time. Perhaps they do have greater insight than anyone else but as the saying goes "economists have predicted nine out of the last five recessions". A stopped clock is right twice a day. If you keep saying the same thing for long enough you will eventually be proved right.

Volatile markets do affect portfolios and seeing your assets falling in value can be very difficult emotionally, particularly when negative headlines are everywhere! Because market volatility is unavoidable we try to be wise before the event, planning carefully with our clients by putting cash aside to cover foreseeable expenses in addition to a good size reserve for emergencies. We also invest only part of a portfolio in the stock market with the rest invested in property, fixed interest and alternative investments.

This diversification can reduce the impact of market falls and smooths returns. The approach helps us aim to ensure that, even when stock markets are headline news, our client's standard of living is protected.

The content contained in this blog represents the opinions of the Equilibrium investment management team. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the reader. You should be aware that the value of an investment can go down as well as up, and no guarantees as to the future performance, income or capital growth are given expressly or by implication.