Yesterday I wrote a piece on how the FTSE 100 index managed to lose almost 250 points in a day on Monday. Trading on Tuesday unfortunately was not much better, with the index shedding over 130 points to finish almost 2% down on the day.
This has mainly been caused by rising concerns surrounding the coronavirus, and potential implications for the UK following outbreak developments over the weekend in Italy. While you can argue that this does not affect the favourite company you are invested in, ultimately the stock market is a gauge for broader market sentiment, and at the moment it is not positive.
I am not one for overt pessimism, and while individual stocks I own have lost ground this week so far, there are still ways that I (and other investors) can make money even during a falling market.
Look to buy domestic
While most of the media focus has been on the FTSE 100 index, the firms within this index are the largest and most international. Therefore, in most cases they are going to have a much larger potential risk to their financials and performance from the virus and potential supply chain disruption from China.
Only three firms within the index finished the day in positive territory, but if we look at the FTSE 250 index, 20 constituents finished in the green. In my opinion, this is because the FTSE 250 contains smaller and more domestically-focused businesses. For the moment at least, these firms are less impacted by such things as global supply chain issues and travel bans as everything from operations to production to sales have some element of ‘Made in Britain’. One example is pub operator Ei Group.
This means that if you owned UK-focused firms within the FTSE 250, your portfolio may have actually gained in value this week.
Soak up dividends
An obvious way you can protect your money in a falling market is simply to buy and hold high-dividend-yield names. One good example I like at the moment is BT, with my thinking explained more here.
But regardless of the individual stock and its share price movements in the short term, if you are holding a stock for a long period and trust the fundamentals, then in the interim you are picking up income from the dividend payouts. So while you may have an unrealised loss on the actual investment itself from the share price fall, you will be making money from the dividends.
Over time, these can actually offset a loss on the share price. For example, let us say you have a £1,000 stock investment that pays you a dividend of £100 per year and you have held it for five years. If the value of the stock investment is down to £800, you would still be up, having received £500 in dividends over that period.
It is really just changing a mindset and accepting that you are seeing a loss on the capital you invested, but appreciating the fact that you are still profitable overall when you take into account the income you have received. That mindset is of great importance during volatile times such as we have seen in the markets thus far this week as it can stop you from panic-selling and potentially missing out on any later upswing.
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Jonathan Smith and The Motley Fool UK have 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.