Are We in a Bear Market?

• Getting a good night's sleep....
• Some perspective
• Timing the market
• Bear Market?
• Should you be worried?

The latter half of 2015 was not ideal for investment markets, and volatility continues into 2016.

For those of you who are relying on investment portfolios to provide a regular income, or capital for specific expenditure in the short term (e.g. house purchase), headlines about the “bear market” in January 2016 will have been concerning, and the FTSE100 continues to fluctuate into February 2016.

In this article, we look at what this volatility might mean for you.

Getting a good night's sleep....

At WJM we would normally recommend an investment portfolio providing exposure to a range of asset classes, providers and geographical areas, thus diversifying risk and aiming to mitigate loss during market conditions such as those currently being experienced.

With a diversified approach and a good relationship, where the adviser has a full understanding of your attitude to risk, investment timescale and objectives, you should be able to sleep well knowing your investments are in the best place they can be for you.

If the above information has highlighted a need to re-assess your investments, WJM’s Wealth Planning team would be delighted to hear from you.

The value of investments can fall and you may get back less than you invested. Past performance is not a guide to future performance.

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Some perspective

We had a look at the FTSE 100’s level over the very long term (January 1984 to January 2016). As you’ll see in the table below, the mega volatility of the FTSE 100 (by which we mean “Wow, my investments have soared in value!” followed by “Aiii, my investments are haemorrhaging value!”) has only been around since the late 90s. 

^{(Graph source: uk.finance.yahoo.com on 25.02.16; red line added by WJM)}

The most dramatic parts of the graph occur between 1995 and the present, representing the dotcom bubble/burst, the credit crunch and (minimal against these events) the current dip.

However, if you trace a straight line from the left of the graph, hitting the lowest market points until present day (see red line in image above), you’ll see that even the lowest FTSE 100 levels (the dotcom bubble bursting and the credit crunch) exceed the index’s previous growth pattern.

NB: The FTSE 100 itself is not always necessarily the most accurate measure of UK markets due to the preponderance of a small number of sectors (e.g. oil, banks) and the percentage of overseas earnings received by the listed companies.

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Timing the market

Unless you have an accurate crystal ball or a TARDIS, it's hard to consistently time the market.

You cannot know when the highest point of the market will be reached and therefore when to sell; you cannot know when the market has bottomed out and therefore when to buy. If you sell while markets are on a decline, you may in fact make the ultimate market low even lower (see investor sentiment comments, above).

The best advice for most investors is to invest when you can, and sit tight through volatile periods.  Sensible investing is generally a long term pursuit: if you are after a “quick buck”, try your luck in Las Vegas!

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Bear Market?

The FTSE 100, the UK’s stock index consisting of the hundred biggest (by market capitalisation) companies on the London Stock Exchange, is the “go to” index for market assessments. The FTSE 100 level fell by 20% within a year (between the end of April 2015 and 20th January 2016) which means it officially became a “bear market” in January.

There are multiple economic reasons for the dips in markets:

• China’s economy isn’t growing as strongly as hoped;
• America increased its bank base rate (making it more expensive for countries/individuals to borrow and thus potentially reducing demand for goods and services);
• Terrorism continues to threaten global stability; and
• Underpinning it all, the oil price continues to fall while oil production continues undeterred. The oil supply exceeds the oil demand, and this could mean that global production is falling, which itself indicates economic slowdown.

Markets aren’t just affected by statistics, though; investor sentiment plays a huge role. While a person or company may initially make investment decisions based on sound economics, reactions can be influenced by press headlines and herd mentality, resulting in mass sell-offs and actually causing further dips in market values.

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Should you be worried?

Your reaction to market dips really depends on your attitude to risk, investment timescale and objective.

If you have zero tolerance of risk, you are unlikely to have any stockmarket-exposed investments and therefore you don’t need to worry about markets. But for those prepared to take on some risk in exchange for some potential reward, investment timescale and objective should be considered.

For example, if you have a medium to long investment timescale (5 to 10+ years) and an objective of capital growth or continuing income, we would typically recommend sitting tight. “Swings and roundabouts”, as they say.

But what if you have a short investment timescale and an objective of imminently spending your invested capital? In these scenarios, your adviser should already be aware of your timescale and objective, and you may already have been moved into lower risk assets which are less exposed to stockmarket swings.

If you don’t fall into this category, though, you should still be aware of market conditions - and there’s no getting away from the fact that your investment values will likely have fallen over the last year. In these circumstances, you should consider the current value of your investment portfolio and whether you want to protect it from any further loss by moving to lower risk assets, or cash, in order to preserve its value for your imminent purchase.

However, depending on when you actually invested, your portfolio may still be showing a gain overall - even with the current losses. Before deciding to sell, keep in mind the capital gains tax allowance (£11,100 for this tax year) and the impact of any capital gains tax if the allowance is exceeded. You should also check if there are any exit fees on your particular investment which could exacerbate a loss.

At the moment any loss is only a paper loss – selling will crystallise that loss. If in doubt, take advice.

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