It has been a bad day for the FTSE 100, which has fallen almost 4% this morning. You may have seen headlines warning that an incredible £70bn has been wiped off UK share prices, which sounds like a mind-boggling sum. So how do you respond, aside from selling up and heading for the hills?
The first thing to say is probably the most obvious one. Don’t panic. This is the kind of thing the stock market does. That’s because it reflects human anxieties, right back at us. Today people are worried, and the market has fallen. Tomorrow could be different.
As a private investor, the worst thing you could do is sell up every time there is a setback like this, because that guarantees to turn your paper losses into real ones.
Time is on your side
Timing the market is all but impossible. In my early days of investing, I used to try second-guessing share price movements and got it wrong again and again. Now I simply buy shares and funds with the aim of holding them for the longer run.
Most of us are investing to build long-term wealth, say, for retirement. This means putting money away over 20, 30, 40 years or more, and over such a period, today’s drop won’t even register as a blip.
The other danger with selling up is that you then face the decision of when to buy back into the market. Typically, you will not summon enough courage until after markets have started to recover, which means you could even re-enter at a higher price than you sold.
Plus you will have missed out on all the juicy dividends you would have generated during your time out of the market. Those dividends would have been particularly valuable, because if you automatically reinvested them, they would pick up more stock at the cheaper, bargain price.
Some will be taking the opposite view, and rather than selling up, they will be looking to take advantage of the drop by purchasing shares. There are plenty of apparent bargains out there, particularly in the travel sector, with budget carrier easyJet down 15% at time of writing, travel operator TUI and British Airways parent firm International Consolidated Airlines Group both down around 8.5%, and cruise operator Carnival down 6%.
Play the long game
I have more sympathy with this approach. Who doesn’t like a bargain? It is worth building up a watchlist of top FTSE 100 or FTSE 250 stocks that you like and admire, then buying them during a short-term stock-market blow off. I’d favour companies with loyal customers, growing revenues, healthy cash flows, good management, and with a strong position in a growing sector.
The danger is your stock picks will have even further to fall, but that’s the risk you take. Nobody will ever time the exact top or bottom of the market.
Whichever stocks you choose, aim to hold onto them for the long term, rather than trying to make a quick profit on short-term volatility. Investing is a long game.
Harvey Jones 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.