It can be easy to lose your head when bombarded with financial headlines screaming about stock markets crashing.
Scary-sounding phrases, like “bear market” and “carnage ahead”, popping up on your news screen can be worrying and unsettling for anyone.
As a stock market investor myself, it’s impossible not to wonder, “Should I be doing something about all this?”
But from my own experience, there are two very good reasons not to panic.
When investing in stock markets, perspective matters
When it comes to investing in shares, perspective is a great thing to have. And as a long-term Foolish investor, it’s the first reason I’m not running around like the proverbial headless chicken.
You and I both know scary numbers make for great clickbait headlines. But what happens if I look at the same thing – but from a different perspective?
For example, if I look at the performance of one of the most popular ETFs available, Vanguard FTSE Allworld (LSE:VWRL), what can I see?
At the time of writing, it had lost over 4% in the last five days: that’s not insubstantial for a well-diversified tracker. It gets worse if I look at the year-to-date performance — that’s down over 10%.
But wait — if I continue to zoom out, I see that over the last five years the exact same tracker has made over 35%. So, despite this year’s losses, that’s still an annualised return of over 6%.
It gets better yet if you look at the same Vanguard ETF over 10 years, working out at an annual return of over 9%.
So yes, it’s easier to invest when stock markets simply rise smoothly. But as a long-term investor, I knew I needed to expect market corrections along the way.
That’s why when it can seem all doom and gloom, remembering the bigger picture gives me a great reason not to panic.
The importance of a diversified portfolio
Now, it’s all well and good talking about long-term averages on a global tracker, but as a Foolish investor I also hold several individual shares. That can be a different ball game entirely.
For example, if my portfolio only contained Netflix shares, I would be down over 70% this year. And even though it’s still up on a five-year basis, that would be hard to handle for sure.
But here’s the thing: if I’ve done a decent job of diversifying my portfolio, I likely have other shares that have increased in value.
This diversification effect means my portfolio value is far less exposed to those single large shocks — which is another good reason not to fret over the recent stock market moves.
But markets are falling — what should I do?
So should I be doing something about the recent stock market falls? Personally, if anything, I’ll be adding to my investment portfolio over the upcoming weeks. There are several good companies out there with share prices becoming increasingly attractive.
Yes, I may have to see them in the red for a while, but if I choose wisely then eventually my investment portfolio should end up even stronger as a result.
A long-term perspective with a well-diversified portfolio will always give me the best chance of success — as well as my two reasons I’m not panicking over the stock markets!
