That August feeling

1st September 2015

The summer holiday month was anything but relaxing for investors in UK shares

As well as being the title of an Edna O’Brien novel, “August is a wicked month” probably sums up how many investors felt about the month. It was all going rather unexcitingly around the middle of the month, when the combination of a devaluation of the Chinese currency, the renminbi, and a plummeting Chinese stock market prompted share markets around the world to drop sharply.

In the UK, the usual “billions wiped off shares” headlines emerged, although when the market rallied in the closing days of the month, there were no corresponding “billions added to shares” headlines. As the graph below shows, over August the FTSE 100 (the red line) fell by 6.7%, having at one stage been down nearly 12%. The rollercoaster ride was less marked for the FTSE 250, which fell 3.2% over the month, with its biggest drop 8.3%.

The difference between the two indices is down to their differing constituents. The FTSE 100 may be a UK index, but it contains more than its fair shares of mining and oil & gas companies with little or no exposure to the UK economy. On the other hand, the FTSE 250 consists of the 250 medium-sized UK companies below the FTSE 100’s multinational behemoths and as a result is more closely linked to the UK’s fortunes. A fund manager concentrating on the FTSE 250 constituents should have fared better than his counterpart picking from the members of the FTSE 100.

The sharpness of the changes in the markets were all the more marked because conditions had hitherto been so calm: until mid-August the FTSE 100 had been largely confined to a band between about 6,500 and 7,000 since the start of the year.

One lesson of August is something many people find hard to accept: timing investment is virtually impossible. The August drop came out of nowhere and, at the time of writing, in many markets was partly unwound by the start of September. In such conditions, there is a lot to be said for making regular monthly investments and ignoring front page headlines, particularly when on holiday.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

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