How to protect your investments when markets get spooked

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 can be the stormiest and darkest period for investors. October is a pretty bleak month for UK households as colder temperatures and shorter days mean higher gas and electricity bills. This month bills will rise as a result of new energy prices from 1 October, adding more pressure on already stretched family budgets.

You might wonder if it’s paranormal activity at work when looking 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.

Investing during the year of 2022 hasn’t been for the faint-hearted, with global markets in turmoil and portfolios taking a hit in the short-term. With energy bills rising yet again in October, it might prove a rocky ride.

However, other October market bumps have proved mighty frightening – and long-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 (Russia’s invasion of Ukraine triggered much stock market disruption, and looking back further, 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 soaring inflation, interest rate rises and anxiety over the outcome of political unrest and 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 muscular intervention from the world’s central banks and policy makers, particularly in the US – helped reduce market anxiety after the 2007-8 Financial Crisis struck. There’s hope that the UK Government will do something to stem rising energy prices to reduce the burden on household budgets.

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 to 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 rockier, 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.”

Focus on the long term when markets take fright

Clare Francis, Barclays Director of Savings and Investments, says:

“It can be hard to hold your nerve when there’s so much uncertainty. A lot of people are probably questioning whether keeping their money invested is the best thing to do at the moment, which is understandable, particularly if you’ve seen the value of your investments fall over recent months and are worried about rising living costs. But unless you need that money right now, take a step back and remind yourself why you invested in the first place. Investing is for the long-term, or at least it should be, and even though things may appear uncertain today and there might be further turbulence in the stock markets, the long-term reasons to invest remain as valid as ever. So try and resist any temptation you might feel to pull your money out and instead sit tight, and hold your nerve.”

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 rewards to investing can never be reliably harvested by timing the market – jumping out of all of your investments when you think you see trouble ahead and only returning when the coast appears clear. In fact, this is a more or less guaranteed way to lose over time.”

Hobbs points to Smart Investor’s Ready-made Investments – a range of funds which are selected and run by a Barclays team of investment experts, giving you access to balanced investment portfolios with different levels of risk.

Hobbs adds: “The diversified access to the world’s investments we offer is the product of the efforts of multiple teams of specialists. These experts are charged with, among other things, mathematically imagining hundreds of thousands of different viable futures for the world economy and finding the mix of assets that sits most robustly in amongst all of them.The aim of all these efforts is to make sure that your investments are best equipped to scoop up the long-term rewards to humankind’s incredible capacity for adaption and innovation.”

“As we invent new stuff and get better at using that new stuff, from the humble excel spreadsheet to the incoming advances in Artificial Intelligence, corporate profits are among the beneficiaries as are the owners of those companies – that’s you as soon as you take the plunge and invest (and stick with it).”

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 investment prices creates the buying high and selling low behaviour that we see plaguing the performance of many investors.”