A market panic is a great time for learning – make the most of it.
Regular readers of the Fool might recall that my teenage son, Sim, embarked on his investing career just over a year ago.
He's building a portfolio of family firms by making monthly investments using The Motley Fool ShareBuilder service. Last month, in reviewing his portfolio at the end of the first year, Sim wrote:
"I've really enjoyed watching the percentage rise (and fall slightly at times) over the year. I know to expect there will be big falls sometimes, but I haven't really experienced that yet."
Now he has! The turmoil of the past fortnight has given him a real taste of what a market panic feels like. How did he cope? And what did he learn?
Before you've ever invested money in shares, it's quite easy to be blasé about the warnings you may have read.
You might, for example, have come across Warren Buffett's famous caution: "Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market."
If you thought, 'Yep, no problem, I can handle that', before investing, you'll almost certainly have found the recent market panic a lot tougher to deal with when you've got hard cash at stake -- and the markets haven't even come close to falling 50%!
Sim has occasionally mentioned the level of the Footsie to me over the past year, but the finance app on his phone began working overtime as the market went into freefall. I was soon getting a running commentary: "Down 100 points, Dad -- no, hang on, 130 -- Back up 50, phew -- Down again!"
Don't panic. Remember, this is what markets do. You're a stock picker, you're looking to buy good companies at good prices, and you're investing for the long term. The last place you need to be at times like this is caught in the headlights, knowing the price of everything and the value of nothing.
To a degree, Sim was prepared for a market correction. In June, when he made his twelfth investment, we noted that. "Over the last couple of months we've struggled to find compelling investment opportunities in our family firms universe using sales, earnings and dividend valuation methods."
There were plenty of companies Sim had researched and would like to have owned, but they had seemed to be just too expensive at the time. "If only they were a bit cheaper," was a grumble I heard from him on many an occasion.
To be fair to Sim, after initially being transfixed by the falling markets, the penny did drop. I was pleased when, without any prompting from me, it occurred to him that maybe this was an opportunity to buy some of those companies that had previously seemed too pricey.
Sim was constrained by the relatively small amounts he is investing (£150-a-time), and the four fixed dates a month of the ShareBuilder service, which makes investing such small sums economic.
The markets had risen from their lows by the time he invested, but he was nevertheless able to pick up a couple of companies that he'd had his eye on for some time.
The market isn't your portfolio
For all investors, but particularly novices, market panics are a great time to learn about your portfolio and yourself.
I encouraged Sim to ignore the wider market, and concentrate on observing the behaviour of his portfolio and noting how he felt.
One thing that particularly irritated him was that we had added to our holding in Hikma Pharmaceuticals (LSE: HIK), at 709p, the very day before the market embarked on its multi-day decline. It fell as low as 537p.
These things happen. We might be deep in the red on Hikma, but we bought at 709p because we felt it was good long-term value at that price. Nothing changes that. You have to keep things in perspective.
On the subject of perspective, I pointed out that some of our other more recent buys, such as Robinson (LSE: RBN) and Mountview Estates (LSE: MTVW) had held up remarkably well.
Indeed, the portfolio as a whole had been more resilient than the market. At the end of last week, the unit value had fallen just 7% since Sim's July review, compared to a 13% fall for the FTSE All-Share tracker he monitors.
For novice investors, it can be difficult to know how volatile your portfolio is when markets are rising. A market panic gives you a good chance to see that, and to see whether you can stomach the level of volatility or whether you may need to make some adjustments to the balance between riskier and safer companies.
In summary, then, when markets are going bananas: don't panic; look for opportunities; and learn about your portfolio and yourself.
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> G A Chester owns shares in Hikma Pharmaceuticals, Mountview Estates, and Robinson. The Motley Fool owns shares in Mountview Estates.