The FTSE 100 index has staged a miraculous comeback in 2019 so far. Back in December, global equity markets were falling sharply. It was a challenging time for investors, and by late December the FTSE 100 had fallen to around the 6,550 points level, down around 13% from its level at the beginning of the fourth quarter.
Yet things can change very quickly in financial markets, and today, the FTSE 100 is back up around 7,450 points, approximately 14% above its late-December low.
That’s a stunning recovery in just over three months. But I wonder how many investors missed this rapid recovery?
How did you play the dip?
You see, when markets are tumbling, investors often make irrational decisions. Some will sell stocks and lock in losses. Others stop making their regular investments. Some investors even sell their entire stock portfolios because they don’t like seeing their wealth decrease.
Here at The Motley Fool, our advice in Q4 when stock markets were falling was generally along the lines of:
Put together a watchlist of high-quality buy candidates
Drip-feed money into the market when attractive opportunities present themselves
In general, that advice tends to work well when stock market volatility is high.
Personally, I took advantage of the dip to add a few new names to my portfolio and boost a number of existing holdings. For example, I got into Hargreaves Lansdown near 1,700p, property website Rightmove at around 425p, and consumer goods champion Reckitt Benckiser below 5,800p. Today, I’m sitting on gains of around 18%, 16% and 8% with these stocks.
Yet you can be sure that plenty of investors panicked in the stock market chaos, and did the exact opposite of our advice.
For example, a friend of mine decided to cancel his regular monthly investment plan in Q4 because he was convinced the market was heading lower. That’s backfired because he wasn’t able to buy stocks when they were trading at bargain prices.
Another investor I know has had 80% of his portfolio in cash over the last few months. So, his overall portfolio return over the first quarter has been around 2% – far below the market’s return.
Ultimately, there are a couple of key takeaways from the FTSE 100’s performance in recent months.
First, in the short term, no one really has any idea what markets will do. They can rebound just as quickly as they fall. No one saw this quick bounce coming. So selling out of the market can be a dangerous game. You can miss out on big gains.
Second, significant equity market dips of 10%, 15% or more can often be great opportunities to add to your portfolio. When other investors are panicking, high-quality companies are often trading at bargain valuations.
Of course, stock markets dips can be challenging. No one likes seeing their wealth drop. Yet selling to avoid losses, or not investing, generally isn’t the best move. If you can train yourself to go against the herd and take advantage of others’ irrational behaviour, you can often do quite well for yourself.
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Edward Sheldon owns shares in Hargreaves Lansdown, Rightmove, and Reckitt Benckiser. The Motley Fool UK has recommended Hargreaves Lansdown and Rightmove. 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.