They say that when China sneezes, the rest of the world catches a cold. So when China suffered the financial equivalent of a massive heart attack at the beginning of the week, the world’s financial markets duly went into full-scale panic mode. But what does this mean for your investments?
Black Monday, as it was quickly dubbed, was the day when the myth of China’s invincibility crumbled. By the time trading was done, stocks were down 8.5% the biggest single day loss in eight years.
The reverberations were felt all around the world. The Nikkei fell by over 4% and the Dow opened more than 1,000 points down. Oil hit a six and a half-year low as commodities took a tumble. Approximately 73.74bn was wiped off the FTSE Index. China reacted by cutting interest rates in an attempt to boost the economy but to no avail. Stocks continued to fall as investors got rid of anything that had any connection with China.
The question is: how worried should we be and how will this affect your own investments? Investors panicked around the world because their confidence in the underlying health of the international economy was shaken. A slowdown in one of the largest consumer economies in the world could be a signal of bad times ahead for the rest of us.
But it’s not all doom and gloom. Around the world the general prognosis for the world economy is pretty good. In the UK, growth is predicted to be 2.8% in 2015. Against all predictions, the Greek economy did not collapse, but was recently reported to have shown some growth. China itself may no longer be delivering double digit growth, but for an economy of its size, growth is still healthy. In April to June it reported 7% growth and while its figures are often greeted with scepticism, its overall economic condition is a long way from collapse.
So, the short answer is that there is no need for anyone in the UK to panic. Daily values may fall, but in the long term you shouldn’t feel the effects as long as you follow the basic rules of diversification within the portfolio – namely don’t over expose yourself to any single market, and don’t invest in only equities (stocks and shares). As long as you have bonds and cash within the portfolio these should cushion the blow.
The crash may also have been alarming, but it is nothing truly out of the ordinary. Stock markets are cyclical with crashes such as these happening every seven to ten years. There have been big falls on the stock market before and there will be again. As long as you keep your head, the long term value of your investments should hold.
In summary, then, the message is this: don’t panic. Although it’s easy to be swept up in the hysteria, as long as you stay true to basic common sense principles such as diversification, you should be fine.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM CAN FALL AS WELL AS RISE. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.