Markets have been rocked following an eventful week where Chancellor Kwasi Kwarteng made his, much larger than expected, mini-budget announcement and geopolitics again came to the fore as Putin announced mobilization and made another threat against the West.

As a result we’ve seen an increase in market volatility, particularly in bond markets. We also saw the pound drop to an all-time low against the dollar before later recovering some ground.

Market volatility can be unsettling – nobody wants to watch their investments fall in value. But the key is to keep calm and accept that ups and downs in markets are a normal part of investing.

And history gives us some much-needed reassurance that markets can recover from periods of instability like we’re currently seeing.

Markets tend to reflect human emotions

The thing to remember about financial markets is that they’ve been created by humans. And just like the best of us, they’re vulnerable to a range of human emotions. Fear and greed are the main two, the instinct to follow the herd is another.

That means there’ll be times when markets are excessively optimistic and others when they’re excessively pessimistic. This is illustrated by market bubbles – when markets rise rapidly – and market crashes.

Slow and steady is more likely to win the investing race

As told in the cautionary tale of the hare and the tortoise, you can be more successful by being slow and steady (the tortoise) than quick and careless (the hare). When it comes to investing, slow and steady is usually more likely to win the race. In other words, the longer you’re invested for, the more likely you are to reap the rewards.

The graph below shows how £1,000 invested in the FTSE® 100 Index, which represents one of the UK’s main stock markets, would have grown if you’d left it for 30 years.

Over those 30 years, there have been plenty of market falls and crashes, as well as rises and bubbles. But the main takeaway here is that, over the long term, investments have the potential to grow in value significantly.

Market volatility graph

Hold your nerve

Market volatility has undoubtedly caught out some investors over the years, causing them to panic and sell, losing money in the process. On the other hand, those who’ve been able to stay the course and hold on to their investments patiently are more likely to have reaped the rewards.

While your natural instincts may be to immediately sell investments when things look bad, try to remain calm. Do some research on how markets have recovered in the past, and look through those previous ups and downs to the longer-term returns your investments have the potential to give. Remember though that investment growth isn’t guaranteed – investments can fail to recover their value too. And it’s possible that you could get back less than you paid in.

Concentrate on what you can control

You can’t control how markets perform, but you can control where you’re invested. Periods of market volatility highlight the importance of spreading your money across different types of investments, known as diversification.

If you’re only investing in one or two types of investments then you’re potentially exposing yourself to quite a degree of risk. But diversifying your investments can help reduce the amount of risk you take, and potentially give more consistent returns, with fewer and less severe ups and downs.

There’s help and support if you need it

If you want to keep up to date with what’s happening in global markets, you can read regular market commentaries from our investment experts, Thomas Watts and Richard Dunbar.

If you’re not sure how the mini-budget proposals or other economic events may affect your investments, or are concerned about the impact, you could consider getting financial advice. If you don’t already have an adviser, you can book a free, no-obligation call with one of our financial planners.

The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on abrdn’s understanding in September 2022.

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