This allows us to grow our purchasing power over time. In the case of equities, this uncertainty can be high as the market adjusts its view of long-term earnings and the discount rate it uses to establish market prices. If there was no uncertainty, then there would be no equity premium.
In contrast to the recent sensationalist headlines, such as the BBC’s ‘Coronavirus fears wipe £200 billion of UK firm’s value’ the never-published headline of ‘Over the past 10 years global equity markets have turned £100 into £266, so giving a bit back is perhaps to be expected[i]’ provides some comfort to those already invested. To those who aren’t invested or have money to invest, stocks are cheaper than they were at the start of the year. Good news does not sell as well as bad news!
You may be asking yourself whether this health-driven market event is different to those that have gone before. It is, but only because every market fall is driven by a different combination of events that impact on future corporate earnings. What should remain the same is your response to it: avoid panic, avoid unnecessary emotionally driven investment activity, believe in your portfolio and the power of markets and capitalism to recover in time.
Here are some tips to help keep things in perspective:
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