Why Equities Make Sense Despite Significant Events.

lmi300.jpgIn periods of volatility, it is natural for investors to be concerned about the value of their investments. However it is important to remember that equity investing is for the long term.

Over the past 25 years, equity markets have weathered fluctuating conditions to deliver strong returns.

Equities do carry a higher level of risk than bonds and cash, and investors can expect greater levels of volatility. But as a part of a well diversified portfolio, they have historically proved the best way to grow capital.

Significant events:

  • Black Monday Crash – Oct 1987 Worst single-day market crash in history as the Dow Jones loses nearly a quarter of its value.
  • Gulf War (Desert Storm) – Jan 1991 US- led forces repel Iraqi invasion of Kuwait. Global markets largely take the conflict in their stride.
  • Black Wednesday (Sterling leaves ERM) – Economic imbalances and currency speculation force sterling out of the ERM. A large devaluation in Sterling prompts speedy recovery.
  • Russian default/LTCM Crisis – Aug 1998 – Russia defaults on loan repayments, causing contagion across many assets. Hedge fund LTCM loses billions of dollars, but concerted efforts of global central banks stabilise markets.
  • Height of Tech Bubble – March 2000 – NASDAQ peaks in March 2000, driven by speculative demand for technology stocks. Prices reach unsustainable levels, triggering a dramatic crash and a three year bear market.
  • Terorist attacks on America – Sept 2001 – Investor nervousness grows in the wake ofterrorist destruction of the World Trade Centre. Interest rate cuts by global central banks helps to restore confidence.
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  • Eve of Iraq War – March 2003 – Ongoing geopolitical concerns culminate in makrkets recent lows on the eve of US-led attacks on Iraq. The rapid overthrow of Saddam Hussain alleviates investors fears and restarts growth.
  • Hurricane Katrina – Aug 2005 – The devastating hurricance causes severe loss of life in New Orleans and becomes the costliest natural disaster in US history. The economic impact on the region is catastrophic, and the disaster contributes to soaring global oil prices.
  • Oil Price Peak – Aug 2006 – Supply concerns compound growing demand from China and other emerging markets and force oil prices to new highs.
  • Northern Rock collapse – Sept 2007 – Global credit crunch causes funding problems for mortage lender Northern Rock, which is forced to tap the Bank oof England for emergency funds to remain solvent.

So despite these significant events, historically the Stock Markets have outperformed any other investment over the long term just as long as you stay invested.

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1 Response

  1. Hamilton says:

    Exactly! As it’s been said many times, equity markets have returned 14% on average since the ’20s. The trick is to get in and stay in. It doesn’t hurt to rush into the burning building as everyone is rushing out either. As long as you know the building!

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