On Wednesday, London’s FTSE 100 index suffered its worst one-day fall since January 2016, and the evening’s headlines went wild. “£63bn wiped off UK shares” screamed the press, and “Pension funds hit by market crash“.
When did you ever read “FTSE 100 inches up gradually again” or “Modest amount added to value of UK shares“? That’s what’s been happening on most days, for more than a century now.
When markets fall like this, I get people asking me where this £63bn has gone. Well, it actually hasn’t gone anywhere. The £63bn headline figure from Wednesday is simply the drop, compared to the previous day’s market close, in the total amount of cash that would have been raised had every single share in every single company on the FTSE 100 been sold at end-of-day prices. That’s something that would have been quite impossible.
Only five weeks
And you know what? Although the FTSE 100 ended Wednesday on 7,122.5 points, the last time it was at that level was only five weeks ago. Why didn’t we read headlines on Tuesday evening screaming “£63bn added to UK shares in just five weeks“?
And before you start worrying about all those poor old folk whose pension funds were supposedly so badly damaged on Wednesday (never mind considering that they’re no worse off than they were five weeks ago), let me make one key point. Pensioners want income, and pension funds invest a lot of their cash in dividend-paying stocks. And a fall in the value of the FTSE 100 makes no difference whatsoever to the dividends the funds are receiving.
Good for pensions
In fact, pension funds aren’t just passively watching the indexes and taking the cash, they’re actively investing for future income. And that makes a Footsie fall a good thing, as it helps pension fund managers to secure even better dividend yields when they can buy shares even cheaper.
Royal Dutch Shell, for example, is forecast to pay dividends of 153p per share this year. At close of trading on Tuesday, you’d have had to pay 2,395.5p per share to secure that 153p, but just a day later you’d only have had to pay 2,300p. In other words, you could have bought some money for 4% less on Wednesday than on Tuesday.
To put it another way, if you’d bought Shell shares on Tuesday, you’d have set yourself up to receive a 6.39% return in dividends this year — but if you’d waited for the next day’s market fall, you’d have snagged a potential 6.55% instead. Poorer pensioners? Nonsense.
That brings me to what I think rational long-term investors should do. Suppose you enjoy, say, baked beans — and you have a stash of a couple of dozen cans at home. Now, how would you feel and what would you do if, the next time you went shopping, you saw a big sign saying “Biggest one-day price reduction in baked beans since 2016“?
Would you rue the fact that your beans at home are now worth less, or would you buy more while they’re cheap? The answer to that is my answer to what you should do about shares when stock markets fall.
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Alan Oscroft 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.