Where does the FTSE 100 go next? The only honest answer is – anywhere from here. It’s all over the place right now, as are markets everywhere. The index fell 12% across 2018 and has had an up-and-down start to this year too.
Age of volatility
At time of writing, it trades at 6,889. But another drop like last year’s would leave it perilously close to 6,000. On the other hand, it could go in the other direction. Peter Stephens has made a plausible case for why the FTSE 100 could soar to 8,000 points in 2019.
At the end of 2017, financial analysts were discussing the death of volatility. No doubt they have some other abstract theory to consider now, because volatility is alive and kicking.
Wild ride
This will worry many of you, but it shouldn’t. Volatility is natural. Everyday global markets – or rather, global investors – process a sea of information and use that to make countless buy, sell, or hold decisions. They suffer from fat fingers and frail nerves and are slaves to fear and greed. Volatility is baked in.
They also have to cope with some worrying news flow right now, as populism continues to rattle the liberal world order. We have US-China trade war threats, Federal Reserve interest monetary tightening, slowing Chinese growth and rising debt, Brexit, and a sluggish eurozone economy.
Cold sweat
Right now, the trade war and rising interest rates are the biggest worries. Protectionism and the end of cheap money could leave markets in a far worse state than they are now. Brexit could go badly wrong. The EU could bungle Italy in a similar fashion. US-China talks could collapse in disarray. Anything could happen. So what do you do?
Firstly, don’t sweat the big stuff. There’s nothing you personally can do about these macro-economic worries. You just have to stick to a few ground rules.
Invest for the long-term
If you are likely to need money in the next five years, it shouldn’t be in the stock market, but somewhere safe like cash. This is where you invest to build long-term wealth. Over 10, 20, 30, 40 years, or longer, short-term volatility starts to become irrelevant.
Assess your attitude to risk
If the thought that your invested wealth could fall by 10% or more keeps you awake at night, you should limit your exposure to stocks and shares. Maybe you could put 20% of your money in equities so you benefit when markets do grow, then spread the rest between bonds, cash, property and so on, to reduce your overall risk profile.
Get greedy when others are fearful
If the stock market falls, learn to view this as good news rather than bad. It means that your favourite stocks and funds are now available for a reduced price. If you buy on the dips and hold for the long-term, you will profit from the recovery. Markets always recover in the end, given long enough. Buying top income stocks yielding 5% or more will give you an income while you wait.