MMV297 – What Drives Markets?
Today I got asked the following question by a client: Will the bombing in Syria affect my portfolio? It's a good question, and it inspired this video about what drives markets.
Primarily there are two main drivers:
Here's what drives markets:
Market fundamentals are the basic mathematical and economic drivers of the performance of stock markets. They include:
- The general economic health of a country, region or the world as a whole
- Interest rates
- Commodity prices
- The financial health of a company or sector
…plus many more. These things are all about numbers, plain and simple.
Often running in conflict to the cold, hard numbers is our second factor: investor sentiment. This is all about how investors FEEL about what's going on in the world.
Even if the fundamentals are looking good, it sometimes doesn't take much to make investors nervous, and that in itself can drive markets downwards. Conversely, if investors as a whole are positive, then this can drive markets northwards.
Of course, then there are the black swans, those rare, even one-off events which affect markets too. Things like the credit crisis of 2008-9, or the dot-com crash of 2000. These can sometimes have very pronounced affects on the markets and make for uncomfortable times for investors.
It's important to remember that you can do very little about any of these things. They will happen no matter what you think or do, so you might as well get used to it.
What can you do?
The historical evidence is very much of the opinion that a broad-based, multi-asset portfolio, spread around the world will go a long way towards smoothing out some of the ups and downs in the markets.
If you're going to be invested, you cannot eliminate risk altogether, but you can reduce the volatility of your portfolio by following your granny's advice: don't put all your eggs in one basket. Instead remember that Asset Allocation is the key to managing risk over the longer term.
Plus, watch out for next Friday's video where I'll cover the three main ways you can reduce risk in a portfolio.