Let me put the stock market crash of last year in some perspective. It was just 15 months ago. In that time, the FTSE 100 index is up over 40% from the absolute lowest of sub-5,000. Following every twist and turn in the stock markets since, I was sure of having sussed out every single lesson from the crash.
But when I did the number crunching on the progress since the stock market crash yesterday, it turned out that I had still more to learn. So here are my three new-found learnings.
#1. It is ok not to be prescient
Much as I would have liked to buy as much as possible at the lowest point, there is just no way of knowing when it would appear and what it would be. All of this becomes clear only in hindsight. And that is ok.
I do not need to be prescient. What I do need to know is the general time of decline. And that was March last year as we all know, no rocket science here. If I compare the average FTSE 100 index value last March with the average index value this month, the index is still up 23%. And that can be taken as a rough guide of what the return on individual FTSE 100 stocks would have looked like if I had bought them then.
#2. Keep buying as the stock market crash builds up
If, however, I still do not want to miss buying stocks at low prices, I can keep buying successively as the stock markets fall. Last year, the stock market crash did not happen in one go, for instance. The downward spiral built up over weeks. If I am confident in a company’s fundamentals and if I can keep my nerve while the market melts down, I can make some cool profits in a short time.
#3. The same lessons apply to upswings
The market crash also has lessons as the index starts looking up. It can be an equally unnerving experience to buy stocks as the markets start rising. I do not want to make stock purchases and then get burned. In this instance, I find it helpful to acquire knowledge.
An idea of what the target share price is, how well the company’s financials are doing, and the broad sector outlook influence the share price and can hold me in good stead. This is especially true for long-term investing, which we at the Motley Fool encourage.
#4. Buy the dip, but of course
Even in a rising market, though, there are plenty of opportunities to ‘buy the dip’. Short-term news can really rock a stock’s price. An example of such news can be changes in the top management, as was seen in the case of FTSE 100 luxury brand Burberry yesterday, which fell some 8% in a day. It is rare for such sharp dips to sustain, and if I have already understood the stock enough to buy it, they should ideally not worry me.