MARKET COMMENT
Benefit From A Falling Stock Market

By Bruce Jackson (TMFGoogly)
July 4, 2002

The stock market, as measured by the FTSE 100 index, has now fallen about 35% from its December 1999 peak. Rather than be depressed about this precipitous fall, long-term investors should instead be licking their lips with anticipation.

Let me somewhat qualify the above statement. If you are already fully invested in the stock market, you won't be quite licking your lips as much as someone who is sitting on a rather large cash pile. If you need to sell some of your stock market investments now, for whatever reason, likewise you won't be best pleased by the falls we've seen, and are still seeing.

I'm assuming most people reading this article don't fall into the latter category. If you do, I can fully understand why you're not rejoicing. Losing money is not a pleasant experience, although if you'd invested in an index-tracking fund five years ago, the minimum period you should be invested in the stock market, you'd only be sitting on a very minor capital loss. In theory, if you had to sell today, it wouldn't be the end of the world.

Keep Investing

Keep investing regular amounts into the stock market. You can invest in an index-tracking fund from as little as £25 per month. You can invest any amount of money you like into an index tracking Exchange Traded Fund (e.g. the iFTSE100), and you can invest whenever you like, although with dealing charges, you are better off investing a minimum of, say, £1,000 per trade.

[A little known fact is that when purchasing Exchange Traded Funds, you don't pay any direct stamp duty. That's a nice little bonus.]

If you are confident enough to invest in individual shares, keep buying them as the market falls lower. Top up on your existing holdings as they become cheaper, presuming of course that you consider them to remain good value, and that their underlying qualities remain largely unchanged. If you find yourself saying "I can't believe my shares in BearBankDrug PLC are still falling; they are so cheap now." then you may find yourself staring a buying opportunity in the face.

Trade Your Way Into Cheaper Shares

You are fully invested in the stock market, and have no spare cash to invest. Yet you want to take advantage of some of the opportunities you see in the market. What do you do?

Switch. Sell in order to buy.

Take a look through your current portfolio. Rank your shares, putting the holding with the best medium-term prospects at the top of your list. You may rank them by their dividend yield or by their price to earnings ratio (P/E) or some other measure. Now look at the company at the bottom of your list. Would you be better selling that company and reinvesting the cash back into the company at the top of your list? In most cases, I'd suggest the answer would be yes. These days, if you are trading online, brokerage costs of between £10 and £20 make it very easy and affordable to buy and sell.

Trade your way to a cheaper (in terms of valuation) and better portfolio.

The Bottom Line

A falling stock market presents opportunities for rational investors. Make sure you're positioned, both financially and mentally, to take advantage.

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