When global stock markets are falling, there’s no doubt investing can be a little scary. No one likes seeing their hard-earned capital shrink. This is especially true if you’re new to investing and haven’t experienced these kinds of conditions before.
However, what you do when markets are volatile can have an enormous influence on your overall success as an investor. Play your cards right and you could actually profit from stock market volatility over the long term. Play your cards wrong and it could be severely detrimental to your net worth.
With that in mind, here’s a look at three things not to do when the FTSE 100 is falling.
If the market is plunging, don’t panic. It’s important that you remain calm. If you’re calm, you’re much more likely to make rational long-term decisions. If you’re panicked, you may end up doing something you’ll regret later on.
I’ve found that one of the keys to staying in control is to understand what’s going on. Find out why the markets are falling. If you understand why stocks are declining, it can be a little less scary.
Second, put any falls in perspective. Recently, the Dow Jones experienced its single largest one-day fall ever. The index was down 1,597 points at one stage of the day – a 6.3% decline. Looking at that figure in isolation, you could be forgiven for being concerned.
However, when you consider that over the last two years, the Dow had risen around 65%, that drop doesn’t look so bad. Global markets had a great run, so it was only natural that a correction would occur at some point in time. Unfortunately, the simple fact is that stocks often fall a lot faster than they rise.
Don’t obsess over profit/loss
Next, when markets are falling, don’t obsessively check your portfolio’s value. Constantly checking your profit/loss will drive you insane. It’s not healthy for your mindset.
Instead, get away from your screen and find something to do that will take your mind off the markets. Walk the dog or hit the gym. This will help you relax and put you in a better frame of mind to make rational long-term investment decisions.
Lastly, don’t sell your stocks just because the market is falling. Don’t stress if some of your holdings are showing a loss. Stocks rise and fall, sometimes quite dramatically.
For example, I bought shares in Royal Dutch Shell a few years back at around 1,900p. A short time later, the stock was trading at 1,300p as global markets and the oil price nosedived. I could have sold up and locked in a loss. Instead, I held on. That was a wise move in hindsight. Just recently, the shares were trading as high as 2,600p, meaning that I was sitting on a healthy profit.
Stock market volatility is part of investing. Even high-quality FTSE 100 stocks can experience wild swings in price at times. The key is to hold your nerve and remember that investing is a long-term game.
For higher returns, avoid these classic investing mistakes
With global markets down sharply, now could be a good time to read our report The Worst Mistakes Investors Make.
The report lists all the classic mistakes that novice investors make, and could help you become a better investor.
Better still, it's FREE, and can be downloaded within seconds, simply by clicking here.
Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.