Now is the time for investors to hold their nerve

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If you have money invested in the stock market, for example in a pension, ISA or shares in individual companies, recent events may have been cause for some concern.

Over the summer, fears over China’s ability to maintain the rate of growth it has enjoyed over recent years sent the Shanghai Composite Index plummeting – it lost 9 per cent of its value on ‘Black Monday’, August 24 – and markets around the world followed it down.

In the UK, the FTSE 100 Index of leading shares sank below 5,900 points, 17 per cent lower than the all-time high of 7,090 recorded in April this year. Since late August, the FTSE has bounced back to some extent but it is understandable that investors or those considering putting some money into, say, a pension are a little nervous at present.

It is vital to remember, however, that the type of volatility we have seen in recent weeks is simply part and parcel of long-term investing. Share prices can rise and fall sharply in the short term, and dramatic falls in particular can generate some worrying headlines.

But over longer periods of 10 years or more, returns from equities have in the past tended to outperform the likes of cash and bonds more often than not; although past performance is not a guide to future performance.

Due to the long-term nature of investing in the stock market it is often recommended to those who are saving for retirement, or even for their children’s university education: a long investment timeframe could mean that any short-term volatility such as that experienced over the summer can be ridden out.

The markets aren’t always the answer, of course: if you want to set money aside for a new car or holiday, shares and stock-market funds are unlikely to be the best idea. This is because there’s an increased risk your investments could decline in value just as you’re about to take out money.

But if you are putting money into stocks and shares for the long run, it is important not to let short-term price changes cloud your judgement. Reacting to market falls by selling your investments will only serve to crystallise losses – whereas by leaving your cash where it is, you’ll still have the opportunity to benefit if values rebound.

Bear in mind as well that share prices and index values only tell part of the story: investors also benefit from the dividends paid out to shareholders. Having these dividends reinvested on an ongoing basis can provide your portfolio with a significant boost.

The key to successful investing lies in creating a diverse portfolio that accurately reflects the level of risk you wish to take on.