Viewpoint: Avoid knee-jerk reactions to market volatility

Since early September, both the FTSE 100 (UKX) and FTSE Allshare indices have lost 8% of their value and are sitting at a 15-month low, with the pressure from a slump in oil prices unlikely to ease any time soon.

Global growth guidance has also been lowered in a month that is notorious for putting the frighteners on investors in the run up to Halloween. October has gained a reputation as one of the most volatile months, and with good reason - think the Wall Street Crash of 1929 and Black Monday in 1987. Last month, Interactive Investors' Lee Wild gave investors tips on how to benefit from volatility, as long as readers have a healthy attitude to risk.

And today international investment strategist at deVere Group Tom Elliott has advised investors to ride the storm, avoiding any knee-jerk reactions to the current slump.

The current weak oil prices are the result of a perfect storm created by stronger supply and weaker demand. The stronger supply is largely due to shale oil production coming on-stream in the US and Libya, and Iraq coming back on-stream in a big way. This means significant month-on month increases in production from OPEC members, including Saudi Arabia.

This is combined with the relatively weak growth in demand ‎from the eurozone because of its weak economy, the fact that China's growth rate is slowing, and because Americans are using oil more efficiently - which is a side effect of high oil prices over the last decade.

This poses big questions for oil-export dependent countries, whose break-even prices - the price they need oil to be in order to finance state spending - tend to be between USD $80 and $100.

On the bright side, lower energy costs will boost profits of energy intensive companies worldwide, and will lower import bills for energy-importing countries.

Don't overreact

I would urge investors to avoid knee-jerk reactions to the oil price slump and gloomy global growth forecast that is creating the current stockmarket volatility. Volatility is normal and what has been abnormal is the recent period of low volatility.

Investors are likely to profit by sitting still and not selling and having to buy back at higher prices. What is happening now in the markets is why a multi-asset approach to investing is undoubtedly the best solution to long-term investing.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.