The last week has been quite brutal for stock market investors. Overnight, in the US, the Dow Jones Industrial Average fell 3.15%, while the technology-focused Nasdaq Composite index plummeted 4.08%. Here in the UK, our own FTSE 100 index has fallen from 7,500 points to under 7,050 points, a decline of around 6%, in just over a week. As I explained in a previous article, investors are panicking because interest rates in the US are rising and this, in theory, makes stocks less attractive.
When the stock market is falling, it can be scary, especially if you’re new to investing. However, it’s important to realise that periods of high volatility are a completely normal part of stock market behaviour. And how you deal with these periods of turbulence can actually have a big impact on your long-term returns. With that in mind, here’s a look at what to do now that volatility has returned to global markets.
The first thing to do when volatility is high is to stay calm. It can be easy to work yourself up into a panic when stocks are falling, but this won’t help you. Making calm, rational decisions is one of the keys to long-term investing success. Remember – you haven’t actually lost money until you sell. The chances are, stocks will recover, as they always have done in the past.
Put things in perspective
Next, put things in perspective. Global stock markets (especially US stocks) have enjoyed a strong run over the last few years, so a pull-back is not totally unexpected. Investing is, and always has been, a long-term game and there is always plenty of ups and downs along the way.
History shows that over the long term, the stock market is capable of producing excellent returns for investors. Last year, analysts at Hargreaves Lansdown examined the growth of £10,000 invested in the FTSE 100 index between 31 August 1987 and 31 August 2017 – a 30-year period that contained no less than three major market meltdowns. The result? The portfolio grew to £106,000 when dividends were reinvested, representing an annualised return of 8.2%. That kind of long-term return certainly beats the returns offered from bonds.
Create a wishlist
Lastly, with many stocks now considerably cheaper than they have been in the recent past, consider putting together a wishlist of high-quality companies that you would like to buy, with a view to drip-feeding money into the market slowly. Right now, you can pick up a number of highly sought-after FTSE 100 stocks such as Unilever, Diageo and Hargreaves Lansdown at much lower prices, meaning that more value is on offer. While I can’t guarantee stocks won’t fall further in the near term, patient investors should be rewarded over the long term.
Investing is a long-term process and there will always be ups and downs. The recent market volatility is nothing new. The chances are, the turbulence will pass and we will soon see what a great opportunity it was to buy high-quality companies at lower valuations.
Edward Sheldon owns shares in Unilever and Diageo. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo and Hargreaves Lansdown. 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.