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5 important lessons to remember when the stock market falls

Rises and falls in the stock market are an inescapable part of investing. In the last two decades, the markets have been rocked by war, a global pandemic, and a global financial crisis, all of which saw values tumble.


Time and time again, investors have been rewarded for remaining patient and not over-reacting to periods of raised market volatility.

A panicked sell-off of shares in March 2020 when COVID took hold of the UK would have failed to take advantage of the sudden market recovery that had begun by the end of the month. There are some key lessons that have been reinforced by stock market movements over the last two years. Here are five of them.

1. Short-term volatility is inevitable

The stock market will rise and fall and short-term volatility is to be expected. While the nature of the pandemic led to a historic drop, values steadily rose again in a pattern that has been repeated throughout the market’s history.

Source: FTSE 100

The last thirty years of the FTSE 100 show the effects of the Iraq War in the early 2000s, the global financial crisis of 2008 and the steep drop in early 2020 as the coronavirus pandemic emerged. The impact of the Brexit referendum in 2016 can also be seen.

It is worth remembering that periods of volatility are to be expected, and that, historically, short-term dips intersperse longer periods of price rises.

2. Periods of growth tend to last longer than periods of decline

Not only are short-term falls likely to be followed by rises, but history also shows us that the periods of growth (bull years) will generally last longer than periods of decline (bear years).

Bull and bear markets:

Source: CNBC

A look at the S&P Dow Jones Indices since 1932 shows the difference between the average length and size of the price change in both bull and bear markets. The wider and lengthier blue lines indicate the periods of growth that follow much shorter declines in orange. This pattern can generally be seen repeated throughout the markets.

Remembering this fact when markets fall might help encourage a calm and patient approach, giving individuals the confidence to remain invested and thereby able to benefit from growing returns as the markets improve.

3. The general market trend is upward so record highs are to be expected and should not necessarily be feared

The trend of the market is upward. This is clear from the FTSE 100 over the last 30 years and from the S&P 500. Looking at the US index over the last 80 years highlights numerous peaks that represented all-time highs that were later topped.

Worries about a future fall are understandable when prices are high, but it is important to remember that values are based on the combined knowledge and collective judgement of millions of investors. It does not follow, therefore, that highs must be followed by similarly sized lows.

An upward-trending market means record highs are to be expected as values increase over time. Ignoring the noise and focusing on long-term goals is vital, whether during market highs or dips.

4. Portfolios are diversified to spread risk

The above market analysis considers equities only. The investment portfolios recommended by Ermin Fosse are diversified. This means funds are held across asset classes (of which equities is one), sectors, and geographical regions, to spread risk. It is hoped that when one asset class experiences a drop in value, a rise elsewhere will have a proportional impact on the portfolio.

Investment should always be for the long term and aligned with an individual’s long-term goals, attitude to risk, and capacity for loss. Focussing on a goal when the markets are low is the best way to drown out the noise of the markets.

Remember that a drop in one asset class, sector, or region will not have a directly correspondent effect on a diversified portfolio that is aiming to smooth your investment journey, but equally the same is true on the upside.

5. Concentrate on your goals and avoid trend-chasing

It is important to remember that investing is not a competition with other investors. It is about finding the best way to achieve goals while taking the lowest possible amount of risk.

The rise of social media has seen many – especially younger investors – turning to the likes of TikTok, Facebook, and Twitter for investment “advice”, much of which is unregulated and also fails to carry necessary risk warnings.

Recent social media videos encouraging investors to place their funds with GameStop, or with Dogecoin and other cryptocurrencies, cause dangerous trends to develop that could see substantial losses.

Rather than trying to achieve the biggest gain in the shortest amount of time, investing with a 10-year goal in place, and then working to achieve those investment goals by the end of that period, is a much better way to manage investments. As the end of an investment nears, portfolio diversification is important to minimise the negative effects of an unforeseen fall.

Get in touch

At Ermin Fosse, we use our long experience to help you build a portfolio based on your risk profile and long-term goals, so email to find out how we can help.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Errors and omissions excepted.

Please contact us before you invest / disinvest.

Ermin Fosse Financial Management LLP is authorised and regulated by the Financial Conduct Authority Financial Services Register No: 197438

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