For the last few weeks, most investors’ thoughts have probably been alternating between “wow, I can’t believe how the market is rebounding, I must buy” and “wow, I can’t believe how much selling there is, I must sell”.
If you are an astute investor, you will no doubt have been doing some bargain hunting of your own. But if you are a human being, you will also no doubt have felt at least some unease while doing so.
It can be difficult to master your emotions during times like these. Here are the two mistakes you must avoid to successfully invest in FTSE 100 shares during crises.
Don’t get left behind the (investing) curve
A few weeks ago, when panic was really starting to take hold in the markets, I saw a chart that looked at the number of Google searches for the term ‘how to sell my stocks’. The chart showed the number of searches increasing by a factor of four last week, when the market had already sold off more than 20% from its high.
This illustrates mistake number one. If you are searching for ways to sell your stocks, then you are probably already too late. There are reasons why so many amateur investors lose money during market crashes. Like every other investor, they are unable to time the market. Unlike professionals, they are typically unhedged, meaning they are more exposed to downturns. And, they move slower than everyone else. This means that when they do sell, they get the worst possible price. All of these factors combine to disadvantage the private investor.
What should investors do about this? Try to not get caught up with the herd. I’m not saying you should never sell stocks (particularly if your thesis about them changes). What I am saying is that you need to make your own decisions, and not let yourself be affected by what other people are doing.
Value matters more than timing
I’ve already mentioned that I do not think it is possible to perfectly time the stock market. During a crisis, this means that you are unlikely to be able to buy the absolute bottom. As a result, your holdings will probably decline after you buy them.
While this can be extremely stressful, the best way to put your mind at ease is to concentrate on finding stocks that are cheaply valued, rather than waiting for what you think the lowest price will be.
Consider metrics like price-to-earnings ratio, price-to-book, dividend yield, free cash flow, and how these data compare to the competition. Also, make sure that you look for safer companies – those with strong balance sheets, low amounts of short-term debt, and large cash buffers.
Remember, when markets sell off, even quality companies get caught in the stampede. Your job is to make sure that you find the quality ones.
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Neither Stepan nor The Motley Fool UK have a 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.