Investors are under siege right now as share prices collapse, bond yields slump and cash turns negative. The great wealth massacre has wiped £140bn off the value of UK blue chips in the last fortnight alone.
Panicky investors have driven rates on 10-year UK gilts to an all-time low of 1.226%. Markets can’t see the Bank of England hiking interest rates until 2020. It looks like a full-blown crisis and many investors will understandably want to keep their heads down.
While that’s an understandable reaction it’s also a wrong one that wastes the opportunities available. Times like this are a gift to investors, and you don’t want to throw that gift away. The FTSE 100 has shed nearly a quarter of its value since April 2015, which means if you buy an index tracker today you’re getting a 25% discount on last year’s price. This is the discount that keeps on giving: whether you hold the tracker for 10, 20 or 30 years, your holding will always be worth 25% more.
Come Out Fighting
The Fool repeats this message every time markets go into crisis mode, because it takes constant repetition for the message to sink in. When share prices plunge, the fight or flight mechanism triggers and too many investors flee when they should march towards the sound of gunfire instead.
Most long-term investors learn to curb the desire to sell in the middle of a crisis. All that does is turn your paper losses into real ones, and leave you with the impossible decision of when to re-enter the market, a decision you will get wrong because timing stock markets is impossible.
But it takes a bold investor to pump good money into the stock market during bad times, as there’s a chance its value will plummet almost instantly. Yet at moments like these, fortune favours the brave. You have to remind yourself that you’re not investing for tomorrow, next week or even next year. You should only invest in shares for a minimum of five years, preferably much, much longer, until today’s crisis is only a vague memory.
Value at last?
Things look dark today and may get darker in the days ahead. Personally, I’m glad of the sell-off, because markets had been driven artificially high by loose monetary policy. Now valuations look far more tempting, with oil giant Royal Dutch Shell trading at 6.9 times earnings, pharmaceutical firm GlaxoSmithKline at 7.7 times and global bank HSBC Holdings at 8.8 times. If you’re feeling truly brave, you could try stricken miner BHP Billiton at 7.8 times earnings. These are all roughly half the 15 times earnings typically seen as fair value (although they’re still risky, especially in the short term).
Share prices may have picked up today but the crisis has further to run. Please don’t waste it.
Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended HSBC and Royal Dutch Shell. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.