Last week was a healthy reminder that equity valuations can move swiftly downwards without there being one single catalyst. When investors are already skittish about rising interest rates, Brexit and a host of other potential obstacles, it doesn’t take much to generate a stampede for the exits.
Don’t despair if you found it tough. Here are a few recommendations for how to cope when Mr Market’s mood next sours.
Learning not to panic-sell your holdings is hard, especially with 24/7 news coverage and photos of exasperated traders hunched over their terminals on Wall Street. We are, after all, programmed by evolution to follow the herd in times of apparent danger. Resisting this predisposition when cherished paper profits are getting smaller by the day is easier said than done.
But here’s the thing: nobody on this earth knows for certain which direction the market will head over the short term. Indeed, Friday’s rally, while not enough to erase the losses over the preceding few days, goes to show how quickly sentiment can reverse.
With this in mind, checking your portfolio every five minutes is nothing more than a recipe for stress. So, switch off physically and metaphorically and learn to see uncertainty as simply a part of investing. If this sounds too hard, it’s worth recalculating how much risk you’re prepared to take in the pursuit of growing your wealth and the amount of time you’re willing to stay invested.
Personally, the most I do in such a situation is check whether anything about the companies I’m holding has changed. If not, I stay invested and use the time that could have been spent worrying doing something more productive (or worrying about something else).
Remember that this is all normal
While plummeting markets can be difficult to endure, it’s vital to remember that they happen more often than you think.
As behavioural finance expert Daniel Crosby notes in his book The Laws of Wealth, the US stock market experienced 123 corrections (where stocks fall 10% in price) between 1900 and 2013. That’s more than one a year. Even more severe bear markets (where stocks fall 20%) happen every 3.5 years on average.
When you understand the regularity of such events, not to mention their very limited ability to impact on a person’s ability to grow their wealth over the long term, it’s easier to take them in your stride.
Keep a watchlist
So, we shouldn’t fear falling markets. Actually, we should learn to embrace them. Just ask Warren Buffett.
The Sage of Omaha once remarked that only those who intend to sell in the near future should be happy to see the value of their holdings rise. Everyone else — those who intend to remain invested for at least the next five years — should rejoice when they fall since sinking share prices offer better value. Taking this advice on board, it’s always worth having a list of quality companies you’d buy if they suddenly went on sale.
Of course, it’s no use having a watchlist if you don’t have the cash to eventually pounce. That’s why keeping some powder dry is also recommended. Since interest on cash balances in stocks and shares accounts are often laughably low, this money could be retained in an easy access account elsewhere and then transferred across when needed.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.