What to do when markets drop

Since September we have witnessed a decline in the UK market, with it falling over 6%*.

Whilst this caused concern at the time, it is almost forgotten once the market recovers. With many of you investing for the long term, these short-term corrections can present a buying opportunity.

What has caused the markets to drop?

There are obvious increasing concerns over the Ebola virus, wars in both Syria and Iraq. Couple this  with a lack of growth in Europe, suggesting another potential recession, and worrying economic data from China, it is no wonder the markets are being affected.

So, what should investors do?

Not being able to offer advice makes this question a very difficult one for us to answer. Whilst we cannot give recommendations, there are three main options.

1. Buy more – Stocks are cheaper than they were this time last month, so it could be the perfect time to buy or add to existing holdings. Funds are now yielding more, so if you are willing to take the risk you could see returns in the future.

2. Do nothing – When you initially started investing you should have thought about what level of risk you were willing to take. The majority will choose to wait this out, placing the long-term gains above this, potential, short-term loss.

3. Sell – When markets are falling, it can seem very easy to sell your holdings. But, can you be sure that you will be selling at the right time? Nobody can know for sure where the markets will bottom, and therefore selling would be you crystallising any loss. You could, of course, also miss any bounce in the market, and would you be willing to buy back if the markets fell even further? Remember, switching is free. So, you could choose to switch to the Cash Reserve, until you are more comfortable with the market.

Remember, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” - Warren Buffett

If you would like to make changes to your portfolio, you can do this in three ways:

                                          


Sources: *FE Analytics 1st September 2014 to 22nd October 2014