Falling stock markets are nothing new. The FTSE 100 has experienced a number of declines similar to that which has been recorded during the last seven months. In fact, there have been much larger slumps for the index, with two recent examples being the financial crisis and the dotcom bubble.
During both events, investors became increasingly nervous about the outlook for the index. Many became sellers as they sought to avoid further losses.
The reality, though, is that many private investors buy stocks for the long term. Therefore, the index’s sharp corrections and bear markets are unlikely to mean much more than paper losses – as long as the shares are held onto. And with valuations now lower, it could make sense to ignore bearish investors and instead invest for the long term through a stocks and shares ISA.
Market fear
As is to be expected during a period of falling share prices, some investors have begun to express major concerns about the prospects for the FTSE 100. With risks such as Brexit, a rising US interest rate and further tariffs on imported goods seemingly ahead, it is perhaps understandable that there will be a degree of fear in the future outlook for the index.
However, fear can cause investors to act irrationally, and only focus on the short term. This can mean that instead of buying shares when they are priced low, they end up selling them in order to try to avoid further losses. This can mean that they miss out on what have proven to be the best buying opportunities in the past: when stock markets are trading at lower levels and investors are generally fearful.
Paper losses
For any investor, losses are not realised until the investment in question is sold. In other words, the FTSE 100 may have declined significantly in recent months, and an individual’s portfolio may now be in the red. However, if their holding period is five, 10 or even 20 years, the chances are that there will be a recovery during that time. History shows that every bear market has been followed by a bull market – and vice-versa.
Therefore, instead of worrying about losses at the present time, investors’ energy may be better used in identifying buying opportunities. After all, the market value of a stock or an index will naturally fluctuate during a long-term holding period. And it is up to the investor to determine when the optimum time is to buy or sell depending on a stock’s intrinsic value.
Outlook
In the near term, investors may become increasingly fearful and the stock market could fall further. This, then, could be the perfect time to focus on your investment plans within a stocks and shares ISA. There are now opportunities to buy high-quality shares at lower prices. And even if they do fall further, this is unlikely to be a major concern to an investor with a long-term view, since history shows that the FTSE 100 has always recovered from periods of poor performance.
