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Why has the market fallen?

February 3, 2022

Keynotes:

  • It has been a tough couple of weeks for financial markets.
  • Shares have been falling from their previous highs of December 2021.

Whilst the daily ups and downs of the market may be exciting for financial news commentators, at Nosso, we understand that market’s ups and downs can cause concern for some of you.

So let us shed some light on the recent market ups and downs.

What has got the stock market spooked?

There are always a variety of factors that can affect the financial markets. The most prominent one currently is the rising inflation across all major economies such as the UK and the US.

On top of making the goods in your shopping basket more expensive, inflation also impacts the stock market and your Nosso portfolio.

To put a lid on inflation, Central Banks (such as the Bank of England) are expected to raise interest rates and financial markets have reacted accordingly.

Generally speaking, interest rates and stocks will tend to move in opposite directions. So when interest rates rise, share prices will go down in response!

Regardless, these price falls will tend to be an immediate reaction to interest rate increases and are not necessarily a reflection of long term prospects of the economy and companies.

This time around the increase in interest rates, is being used as a way for Central Banks to keep inflation under control, following the recent post lockdown economic growth.

The long term view

Whilst these recent events may cause you some concern, it is always important to think for the long term. This approach is the key to a successful investment strategy.

Rumblings about interest rates may spook the markets in the short term. But in the long run, those decreases will be just a blip on your portfolio's radar.

Source: MSCI All Countries World Index Gross January 2001 - December 2021, MSCI World USD Index.

*Please keep in mind, past performance is not a reliable indicator of future performance. Currency of the index is in USD and that returns may increase or decrease as a result of currency fluctuations.

As you can see in the graph above, this isn’t the first time the markets have had a tough time. Since 2001 two big events stand out.

The financial crisis of 2008 and how the markets reacted to the onset of Covid-19 in February 2020.

Historical performance is never a good indicator of future performance. Nonetheless, you can see that in both those cases, the market rebounded and reached new highs.

Luckily, when investing for children, you tend to have time on your side to ride out periods of poor performance.

Pound-cost averaging

Let us introduce you to a little gem called "pound cost averaging" - simply put, investing regularly.

By investing regularly you can potentially “smooth out” the ups and downs of the market.

The idea is that shares will be more expensive if the market is up and cheaper when it’s down. So, if you invest every month, the cost should average out over time.

Not only can this  help smooth out investment returns, it also helps foster the discipline of contributing regularly to your investment pots.

As we say at Nosso, investing is a long term game.

No one likes to see their portfolio go down, but staying in the market and resisting the temptation of knee-jerk reactions can pay off in the long-run!

This blog is provided for information purposes only. The content is not intended to be a personal recommendation to buy or sell any financial product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. Individual investors should make their own decisions or seek independent advice.

When investing, your capital is at risk and may go up as well as down.