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How to protect your investments when markets get spooked

29 October 2020

8 minute read

Markets often get spooked in October. Find out what happened in years past and what to do when markets get rocky.

Who's it for? All Investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • How some of the most famous market crashes spookily happened in October – and what caused them.
  • That markets historically have recovered – though some have done this faster than others.
  • Pick up some expert ‘ghostbusting’ tips on how to respond to market bumps.

“If there’s something strange in the neighbourhood” of the stock market, then chances are it’s October.

The run up to Halloween is often the stormiest and darkest period for investors.

You might wonder if it’s paranormal activity at work when you look at some of the rockier days for stock markets in years gone by, which frequently, and some might say spookily, have occurred in October and often caused by something unexpected.

It is unclear why stock markets get especially spooked at this time of the year. Theories include it marking the run up to the year end, with investment managers making changes to their portfolios or taking profits. More likely it’s just a coincidence.

October 2020 has certainly experienced its own eerie moments, including when President Trump was diagnosed with coronavirus and global stock markets initially responded in fright.

The UK’s FTSE 100 Index of leading companies, already twitchy due to uncertainty over post Brexit trade arrangements and the impact of coronavirus on the economy, suffered a fall of more than 1% on 2 October, though it shook off this decline later in the day1.

Other October market bumps have proved scarier – and longer lasting – with several of the biggest falls in America’s S&P 500 Index happening in October since (and including) the Wall Street Crash of 1929.

What all these stock market falls had in common is that they recovered eventually – though some took much longer than others to get back to where they were.

Although no-one can be sure what stock markets will do next after a fall, there is the chance you’d miss out from any future gains by selling up investments after a fall.

It’s to be expected to be anxious when markets are jumpy. But rather than allow this to stop you in your tracks, such periods can serve as a useful reminder to check your financial goals and remember why you set out on your investment journey in the first place.

Here’s what happened with some of history’s infamous October falls:

The Wall Street crash – 29 October 1929

On 29 October 1929, investors rushed to sell 16 million shares on the US stock market, sparking a collapse in the economy and triggering the Great Depression. Partly to blame for this nightmare situation was the over production of food and consumer goods as demand fell. Too many shares were also purchased using loans – compounding the problem when share prices fell and debts could not be repaid. Most articles you read suggest it took nearly 25 years for the stock market to recover. Dividends were paid over the period, however, which offset some of the pain for investors.

Black Monday – 19 October 1987

The FTSE 100 Index had been happily cruising upwards when in October 1987 it went into a sudden reverse when worries about a global recession and rising inflation started a panic. The situation was magnified by computerised trading – a recent innovation – that failed to cope with the ensuing large volumes of share trades. Looking at share prices alone it took 21 months for the FTSE to return to the pre-crash levels. But had you added in dividends paid to investors this would have revealed that the index recovered much faster, though the FTSE data is not available for this period.

Mini Crash – 27 October 1997

An economic crisis across Asia sparked a 6% fall in US share prices – and led to the New York Stock Exchange being shut early that day to prevent carnage. As it happened the fears were overblown and the market recovered quickly – though a couple of years later investors were to be spooked again as markets headed towards the dot.com boom and bust of 2000.

Financial Crisis bites hard – 15 October 2008

This was a generally stormy October for world stock markets – unsettled as they were by the collapse of investment bank Lehman’s the previous month due to risky loans turning bad in the wake of a US housing price crash. There were several shocks to hit the FTSE, with the most severe one-day decline of 9% striking on 15 October. The index finally hit bottom in March 2009. It climbed back to pre-crisis levels in about 21 months, if you include the reinvestment of dividends.

What unsettles markets - all year round

Markets can become alarmed by any number of things and at any time of the year – but most of all they don’t like uncertainty. They can be upset by anything from trade wars (the US and China have ongoing wrangles, as has Britain with the European Union over post-Brexit arrangements), real wars (the second Iraq war sparked a sharp market downturn in 2003) and viruses – markets fell by more than 30% in March 2020 when coronavirus was declared a pandemic. There are plenty more tricks that upset them, including credit crunches, interest rate rises and anxiety over the outcome of any looming elections.

You needn’t be scared out of your wits

Governments don’t like to see markets upset and will often come up with treats to try and help to soothe both them and the economy. UK Government initiatives such as the furlough scheme announced in March 2020 helped bring relief, while quantitative easing measures – pumping money into the economy – helped reduce market anxiety after the 2007-8 Financial Crisis struck.

Frightened by uncertain stock markets?

If you feel unnerved by rocky markets, consider the following tips from our own investment ‘ghostbusters’. Hopefully they will help you sleep tight – even when markets go bump in the night:

Keep cool and diversify your investments

Ian Aylward, Barclays Head of Fund Selection, on why he likes fund managers who are disciplined and keep a cool head.

He says: “In equities there are two broad streams to investing – value and growth. It is hard to predict which stream will do best in any given period but they are highly complementary. Diversifying across these two approaches is valuable at any time, but especially when markets get choppy. We seek the leading managers in each stream and expect them to stick their respective areas of expertise. This is particularly true when there is heightened volatility – after all, as they said in the movie Ghostbusters, ‘you don’t want to cross the streams!’.

“When conditions are more rocky, we like to see the managers that we use maintaining their cool. We want to see them sticking to their tried and tested investment disciplines and not being spooked. Often this means buying assets that they may have been keeping a close eye on for some time, but have been too expensive historically. In other words, managers often have a short list of names they have researched and are interested in acquiring, but will only do so when their valuation discipline suggests they have become temporarily cheap.”

Build cash cushion to soften blow when markets take fright

Clare Francis, Barclays Director of Savings and Investments, on the importance of an emergency cash fund to turn to if you feel jittery:

She says: “It’s really important to only consider investing once you’ve built up some money in cash savings. You need cash to cover short-term savings goals such as holidays and a new car, as well has having a buffer in place in case of unexpected spending needs like the boiler breaking down or a change in personal circumstances. Francis adds: “This will help your financial resilience so hopefully, if you need to access some money at a time when stock markets have fallen, you can draw on your savings rather than having to sell some investments.”

Be patient and look beyond any ghostly shadows hanging over markets

Will Hobbs, Barclays Chief Investment Officer, on why it’s important to see through the fog and remember the world economy is likely to continue to grow in the medium to long term – and why investing across different assets can help keep demons at bay.

He says: “The race to produce a viable vaccine against Covid-19 provides a reminder of the inventive capacity that we are accessing when we own a diversified slice of the world’s markets. Humankind’s ability to adapt, invent and thrive should not be underestimated. Markets allow us to profit from that ingenuity over time.”

Hobbs adds: “For the shorter term, the recovery so far has been much brisker than feared. To give you a sense of this positive surprise, back in May the Bank of England was expecting UK economic output to be nearly 20% below its pre-coronavirus level by this quarter. Their latest forecast sees the gap narrowed to 3-4%.

“Tactical investment opportunities may arise in the next few months and the team is certainly continually scouring the world for them. However, remember that the main opportunity on offer is the access to all of that incredible ingenuity. There is no timing that, it is just a matter of patience and a little bit of entirely rational optimism.”

Resist letting background noise spook you into hasty moves

Rob Smith, Barclays Head of Behavioural Finance, on why it can be a mistake for investors to apply knee-jerk responses to bad news.

He says: “In a world where we are over-run with information and opinion we can be our own worst enemies when it comes to investment decisions. It’s easy to be unsettled when there is lots of seemingly bad news around, however don’t fall prey to our need to take action without due consideration.”

Smith adds: “Reacting to recent news despite much of it already being reflected in prices creates the buying high and selling low behaviour that we see plaguing the performance of many investors.”

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