Letter from the Editor: When Headlines Shake the Markets

Barely a day passes at the moment without a headline that sends shockwaves through the stock market.

The current tensions in Iran and the wider Middle East have been a stark reminder that investing does not happen in a vacuum. Since bombing began almost two weeks ago, oil prices have surged, we’re all paying more at the petrol pump, and the value of certain shares have peaked. The world’s largest defence contractor, Lockheed Martin, saw its stock price reach an all-time high. At the same time, other stocks have suffered: major airlines, cruise lines and other travel firms have been particularly badly hit.

As an investor, seeing the value of your future house deposit, pension or children’s education fund drop day after day is undoubtedly unnerving. Yet it’s worth remembering that what markets are often doing at times like this is repricing to factor in uncertainty – rather than signalling a permanent change in the valuation of a company.

Historically, conflicts between nations do tend to create short-term market turbulence, but that rarely derails the ability of well-diversified portfolios to grow over time.

So what should you keep in mind when weighing up your options?

• First, markets often move sharply when geopolitical conflicts occur, particularly when energy supplies are threatened or the fear of inflation is raised. But market effects are often temporary, rather than lasting.

• Second, remaining disciplined is more important than attempting to predict the future. Remember the saying: Time in the market matters more than timing the market.

In uncertain times it is tempting to sell everything, move to cash, or chase other assets that appear safer than the ones you’re currently invested in. However, history suggests the greatest danger for investors is abandoning a well-constructed long-term plan at exactly the wrong moment. Selling when you’re down bakes in losses and results in you missing out on a potential recovery down the line.

• Third, diversification earns its keep at times like this. No portfolio can be totally immune to global shocks, but spreading investments across sectors, geographies and asset classes helps cushion the impact when one part of the market is feeling the pressure.

• Finally, uncertainty can create opportunity.

Unsettled times often cause prices to jump to exaggerated highs or lows. While picking the perfect time to buy or sell is notoriously difficult, exaggerated highs and lows can present opportunities to rebalance your portfolio, or invest new money into attractive stocks at unusually low prices.

The truth is that uncertainty is not an occasional blip in markets — it is a permanent feature.

Wars, elections, policy changes and economic shocks all have an effect on market confidence. But the things that make the lines on the charts go up over the long-term (companies making profits, new innovations and technologies being shared, productivity and global growth) tend to reassert themselves given enough time.

What does that mean? It means that for most investors, the best response to a turbulent world is not dramatic action, but quiet consistency.