- On 10 October world stock markets suffered sharp falls because of rising US bond yields and the trade war.
- October was a very negative month for stocks, after a long period of calm.
- A portfolio should answer to a plan defined in advance, with the risk one can bear, and not to the reaction of the moment.
On 10 October 2018, world stock markets suffered sharp falls because of rising US bond yields and the trade war. October was a very negative month for markets, and left many investors with the feeling that the period of calm had come to an end all at once. For many families who had seen their wealth grow quietly, it was a reminder that risk never disappears.
Sudden movements on the stock market test the patience of those who invest. Although they are part of the normal working of markets, when they happen they cause anxiety and push people to take decisions that, with a cool head, they might not take. That is why an episode like this is a good moment to go over calmly the logic of one’s own portfolio and risk tolerance, before fear is the one deciding. Doing so with an adviser helps to distinguish between legitimate concern and an impulsive reaction.
Two factors combined
The rise in US bond yields makes safe money more attractive and shares less so, while the trade war raises doubts about company profits. When both factors coincide, the pressure on stock markets grows.
The mechanism is simple. If the debt of a solvent state offers a higher return, investors demand more from shares, which are riskier, to compensate for the difference, and prices tend to adjust downwards. At the same time, tariffs and retaliation can raise costs and reduce sales, so expectations of profit moderate. Both forces push in the same direction. That does not mean the falls are final, but it does explain why the market is more sensitive at such moments.
A difficult month
October was a very negative month for stock markets. Episodes of decline are a normal part of markets, even if they surprise those who had grown used to a long period of calm.
Falls pass, but each is lived as if it were unique. That is why it helps to remember that, over time, markets have gone through periods of stress of varying length and that investors’ results depend on their behaviour during them. Those who keep calm and stick to their strategy are usually better placed than those who react to every headline, although nobody can guarantee the outcome. What does lie in each investor’s hands is the discipline with which they follow their plan.
The importance of a plan
For those investing over a long horizon, what matters is that the portfolio answers to a plan defined in advance, with the risk one can bear, and not to the reaction of the moment. Selling out of fear after a fall usually turns a temporary loss into a permanent one; consulting an adviser before acting helps keep a cool head.
A good plan sets out in advance the objectives, the time frames, the share one is prepared to see fall and the conditions under which the strategy would be reviewed. With those rules written down, the response to a fall stops being improvised. It is also wise to keep outside the investment any money that may be needed in the short term, so as not to be forced to sell at the worst moment. That separation between long-term money and money for immediate use is one of the most effective defences against hasty decisions.
A well-thought-out portfolio prepares for the bad months before they arrive.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
